Health Savings Accounts (HSA) are better than retirement accounts because they provide many of the same benefits, while providing some distinct advantages.   These advantages can help you build and growth wealth faster.  This can add up to thousands of dollars over time as I’ll show below.

To be eligible for a HSA you must be covered under a high-deductible health plan (HDHP).  Unfortunately not everyone is eligible for a HSA.  But if you are eligible, you should be contributing as much as you can to these powerful investing accounts.  I contribute the maximum I can to HSAs before contributing to other retirement accounts.

Tax advantages

HSAs are more tax advantaged than retirement accounts like 401ks, Roth IRAs, and traditional IRAs.  Contributions to HSAs are tax deductible, as are contributions to 401ks and traditional IRAs.  However, HSAs are more advantageous because withdrawals from HSAs for medical expenses are tax-free.  Withdrawals from 401ks and traditional IRAs are taxed at your income level in the year you take the withdrawals.

This advantage can really add up over time.  In the example below, saving and investing with an HSA provides a more than $15,000 advantage over retirement accounts.  The 401k and HSA accounts both grow tax-deferred, but the HSA provides better tax withdrawal advantages.

This example assumes a 20 year time horizon, contributing the 2018 HSA max for families ($6,900) across all accounts, Roth IRA effective tax = 15%, 50% of HSA spent on qualifying medical expenses, HSA / 401k effective tax rate = 10%.

Withdrawal flexibility

HSAs provide more flexibility than retirement accounts when it comes to withdrawing funds.  Retirement accounts have strict withdrawal rules and penalties for early withdrawals before a certain age.  However, funds in HSA accounts can be used to pay for medical expenses at anytime, at any age, tax and penalty free.

Additionally, you do not have to take the withdrawal from your HSA in the same year as you incurred the medical expense.  Meaning that, if you can afford it, you can pay medical expenses out of pocket, let your HSA investments grow over time, and then tax-free reimbursements later on in life.  To do this you’ll need to keep good records of medical expenses.

Investing your HSA

Just like retirement accounts, you can invest your HSA in a variety of securities.  Your specific investment options will depend upon your HSA management company and the funds they select.  This is very similar to how employer 401k are generally limited to a selected set of funds.
I like investment flexibility.  One minor downside is that HSAs do not provide as many investment options as a Traditional IRA at a brokerage.  However, the same can be said for 401k accounts.  And there are usually enough decent investment fund options in HSA accounts to create a well-diversified portfolio of stocks and bonds.  Some HSAs even have automated investment recommendation tools based on your investment preferences.

Non-medical expenses

Almost everyone will incur medical expenses at some point in life, and medical expenses generally increase with age.  So I safely assume that at least some portion of my HSA savings will be used tax-free for medical expenses.

However, should you not need all of your HSA for medical expenses, you are also able to use HSA for non-medical expenses similar to a retirement account.  To avoid penalty, you must be 65 years of age or older to withdraw HSA funds for non-medical expenses.  Note, retirement accounts allow for withdrawals at age 59.5, so this is a slight disadvantage.  With both HSAs (non-medical withdrawals) and (pre-tax) retirement accounts you will pay income tax for your withdrawals in the year you take them.

Other benefits

HSA funds, unlike Flexible Spending Accounts (FSA), do not expire at the end of each year.  HSAs are also yours to keep when you leave a job.  You can continue to invest and use the account regardless of your employment.


HSAs are better investment vehicles than retirement accounts because they provide better tax advantages and more spending flexibility while still providing many of the same benefits of retirement accounts.

Additional resources

If you’re eligible for an HSA and ready to get started, here is some additional information and some resources:

Eligibility: The IRS sets the rules for eligibility, more details here. To be eligible for a HSA, you must be enrolled in high-deductible health plan (HDHP) and not be enrolled in another health plan or Medicare, and can’t be claimed as another person’s dependent.

Medical expenses: The definition of medical expenses is fairly broad and includes medical, dental expenses, and over the counter medications.  For details, see the IRS link below.

Contribution limits: In 2018, individuals can contribute $3,450 and families can contribute $6,900.

Additional information from the IRS is located here

Why HSAs are better than retirement accounts

2 thoughts on “Why HSAs are better than retirement accounts

  • November 17, 2018 at 9:33 am

    Great article. HSAs are a fantastic way to save for retirement medical expenses. Given that medical costs in retirement average $250k, and you can withdraw just like an IRA after age 65 for non- medical expenses, it really makes sense to fund it first if you have one. Now we just need to change the law so everyone has one.

    • November 18, 2018 at 10:26 am

      Thanks Smallivy. And I agree, expanding access would be great for everyone.


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