Create a tax-free supplemental retirement account using an HSA

Most people overlook or are not aware of the fact that they can invest within an HSA account and use it to supplement their retirement account. An HSA is a tax advantage Health Savings Account that you can open at the time of enrolling into a High Deductible Health Plan (HDHP), such as the one offered through your employer.

The main purpose of an HSA is to provide you a place to save money tax-free and to pay for health related out-of-pocket expenses also tax-free.

Therefore, an HSA has triple tax advantage:

1. Contributions into an HSA are tax deductible
2. Money in an HSA grows tax-free
3. Withdrawals from an HSA are also tax-free as long as they are used for health related expenses

HSA contributions are tax-free
You would contribute into an HSA account, normally as a direct deposit out of your paycheck. You get to pick how much you want to contribute into your account per year. For 2016, there is an annual limit of $6750 on HSA contributions as set by IRS. Limit is there because the contributions into an HSA are tax-deductible. This is one of the key benefits of having an HSA account as it allows you to save money tax-free similar to other (non-Roth) retirement accounts.

Money in an HSA grows tax-free

This is the most overlooked or under used benefit of an HSA. If you can afford to pay for health expenses outside of an HSA, for example by using your regular savings or emergency fund. Then you can invest the money in an HSA and let it grow tax-free. Essentially creating an additional or supplemental tax advantaged retirement account for yourself and your family. That's more tax-free money for you in retirement in addition to your standard 401k/403b or IRA.

Withdrawals from an HSA are also tax-free
You get to withdraw money tax-free as long as you use the money for health related expenses.

But wait... It gets even better: You can withdraw money from an HSA tax-free for any past out-of-pocket health expenses. There is no limit on the time window for how far back you can reimburse yourself tax and penalty free using your HSA account balance. Isn't that cool or what?

In other words, if I need this money down the road, I can reimburse myself from an HSA against any of my past out-of-pocket health expenses as long as I keep a good record of those old expenses in the form of receipts.

This is why an HSA is nicked named as Never-Pay-Tax account and has been one of my favorite ways to save money tax-free for the past 5 years.

Unfortunately, now I can't contribute into my HSA account as I don't have any earned/paycheck income. But I have a hack for that too :)

Since I was investing in my HSA, the balance has grown to be big enough to generate its own cash flow in the form of dividends and capital gains, which then automatically get reinvested, all tax-free. Compounding and tax-free dividends and capital gains provide a snowball effect for the growth of the money in my HSA.

My wife still works and she will start contributing into her new HSA account. We will try to max it out and invest the money within her HSA account, similar to what I did with mine.

We are hopefully not going to need any of our HSA money for a long time as we maintain a nice enough emergency fund to cover any out-of-pocket expenses. We don't plan to touch HSA money till we are of retirement age (20+ years).

Here is an example of how fast HSA balance can grow when contributions are compounded monthly and invested in US Stock market at an estimated 8% annual rate-of-return:

Using current US inflation rate of 1% to increase the annual contribution limit. Source:
That's about 140% tax-free gain on your total HSA contributions over 20 years.

In summary, if you can pay for your current out-of-pocket health expenses using your regular emergency/savings funds while leaving HSA money untouched and invested in a low cost S&P 500 Index Fund -- Short of an end of the world or a major US economy crash, you will likely be rewarded with a large sum of money down the road that you can then withdraw tax-free to pay for any expenses in retirement for you and your spouse. Tax-free withdrawal for any expenses imply that you have past non-reimbursed medical expenses that you can withdraw against.

Health care costs will continue to rise including Medicare and it's only prudent to plan ahead and take advantage of the tax benefits offered by a Health Savings Account and make it part of your overall retirement plan.

Disclaimer: Author of this article is not a licensed/registered financial or investment advisor and does not provide investment advice. This article is for informational purpose only. Please use your own judgment or seek a licensed financial advisor before investing. You, the reader, bear responsibility for your own investment and financial decisions.  


  1. hmmm, never thought of using HSA as a retirement account. This is a great idea.


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