Using Your HSA in Retirement

For many retirees, healthcare is the biggest wild card in the plan. In retirement, Health Savings Accounts (HSAs) give you a lot of flexibility and tax advantages that other accounts do not.

HSAs have a rare triple tax advantage: contributions are deductible, growth is tax-free, and withdrawals are tax-free when used for qualified medical expenses. They essentially combine the benefits of both a tax-deferred 401 (k) or IRA with the tax-free growth and distributions of a Roth account, so long as they’re used for qualified medical expenses.

Below is a simple guide to what is and is not allowed, how to use the popular “shoebox” strategy, and how HSAs can support long-term care needs.

What your HSA can pay for in retirement

Most of us understand that doctor's visits, prescriptions, and hospital bills are considered qualified medical expenses. But there’s so much more.

Another key advantage of HSAs is that unqualified withdrawals are permitted after age 65 without a penalty. Those withdrawals are still taxable (just like withdrawals from a tax-deferred 401 (k) or IRA), but there’s no additional penalty assessed, making HSAs even more flexible.

References: IRS Publication 969 for HSAs and Publication 502 for medical expenses.

HSAs and long-term care

Long-term care is not one thing; it is a spectrum. Your HSA can be a useful funding source when care is medically necessary.

Typically eligible with documentation

• Nursing home care when the primary purpose is to receive medical care or personal care services due to chronic conditions.

• Home health aide services that help with activities of daily living or provide skilled care under a care plan.

• Assisted living medical services when a physician certifies the need; only the portion related to medical care is eligible.

• Qualified long-term care insurance premiums up to IRS age-based caps.

Typically not eligible

• Independent living or the hospitality portion of retirement communities.

• General room and board when the purpose is lifestyle or convenience rather than medical care.

Documentation tip: ask the provider to split invoices into “medical services” and “room and board.” Save the care plan and physician certification with your receipts.

The “shoebox” strategy

If you already have an HSA, you do not have to spend from it right away. You can pay current medical bills out of pocket, save the receipts in a safe place, and reimburse yourself later from the HSA. There is no required deadline to reimburse as long as the expense occurred after your HSA was opened and you keep good records.

Why this matters: it lets the HSA stay invested for years; later, you can withdraw money tax-free by submitting the saved receipts. Think of it like planting seeds today and harvesting when you actually need the cash flow in retirement.

Receipt checklist: date of service; provider name; description of service; amount you paid; proof that you paid; evidence that the expense was not already reimbursed elsewhere. Store digitally in one folder and back it up.

You do not need to submit receipts to your HSA custodian. The IRS places the responsibility for recordkeeping on the taxpayer. You must keep accurate records of all qualified medical expenses you paid out-of-pocket, the dates incurred, and whether you have already reimbursed yourself from your HSA for each expense. If you are ever audited, the IRS can require you to produce receipts and documentation to prove that your HSA withdrawals were for qualified medical expenses. Many people use digital folders and spreadsheets, not an actual shoebox!

Quick example

Maria opens an HSA at 58 and keeps contributing until Medicare. She pays out of pocket for routine dental and vision, saving receipts in a secure folder. By age 71, those receipts total $10,000. She and her advisor decide to withdraw those funds for a once-in-a-lifetime trip to Europe with her close friends. Her HSA stayed invested longer; the withdrawal is tax-free; cash flow in retirement stays stable.

What happens to my HSA if I pass away?

If you pass away, the fate of your HSA depends on who you’ve named as your beneficiary:

• If your spouse is the beneficiary:
  Your HSA becomes your spouse’s HSA. They can continue to use the account just like you could—including reimbursing themselves for any of your (or their own) qualified medical expenses, even those incurred before your death, as long as those expenses have not already been reimbursed.

• If someone else (non-spouse) is the beneficiary:
  The HSA stops being an HSA as of your date of death. The account’s balance becomes taxable income to the beneficiary. However, the beneficiary can use the HSA to pay for any of your qualified medical expenses that were unpaid at the time of your death—if those expenses are paid within one year after your death. Once that window closes or if the costs have already been paid, the remaining HSA balance is fully taxable as ordinary income to the beneficiary that year. If you’ve been using the shoebox strategy and have a large stack of saved receipts and your spouse is not the beneficiary, it can make sense to reimburse yourself before death (for example, if health is declining or an estate transition is near).

Key takeaways

• HSAs are flexible and tax-efficient in retirement.

• The shoebox strategy can boost the tax-free value of your HSA, though strong record-keeping is essential.

• Long-term care expenses are eligible when medically necessary and properly documented.