How Health Savings Accounts help offset rising health care costs and boost retirement planning.

May 20, 2025

Health care costs keep rising and have become one of retirement’s biggest expenses. Today, a 65-year-old might need about $165,000 for health care during retirement, while couples could face nearly twice that amount.1 As we live longer, planning for these costs is becoming essential.

There are several ways to prepare for future health expenses, including special tax-advantaged accounts, Medicare supplement policies, long-term care insurance, and careful retirement income planning. Using multiple approaches often provides the best protection against growing medical costs.

Health Savings Accounts (HSAs) are particularly valuable tools that many people don’t fully use. Created in 2004, HSAs offer exceptional tax benefits for eligible individuals who have high-deductible health plans. These accounts can significantly improve both your current tax situation and long-term financial security.

Health care costs are climbing at concerning rates

Health spending in the United States has grown dramatically over recent decades. In 2023, national health care spending reached $4.9 trillion – about $12,297 per person annually, representing nearly 18% of GDP.2 This is a huge increase from just 5% of GDP in 1962.

This growth comes from several factors including an aging population, more chronic conditions, new medical technologies, expanded insurance coverage, and general health care inflation.

When planning for health care costs, consider these three areas:

• Tax planning: Finding tax-efficient ways to pay for health care, such as HSAs
• Retirement planning: Understanding your future medical needs and how to fund them
• Estate planning: Deciding what happens to unused health care funds

HSAs offer remarkable tax benefits with increasing contribution limits

HSAs are available to people enrolled in high-deductible health plans (HDHPs). For 2026, this means plans with minimum deductibles of $1,700 for individuals or $3,400 for families.3

What makes HSAs special is their triple tax advantage:

1. Tax-deductible contributions: Money you put into an HSA reduces your taxable income
2. Tax-free growth: Any earnings in your HSA grow without taxes
3. Tax-free withdrawals: Money used for qualified medical expenses comes out completely tax-free

For 2026, you can contribute up to $4,400 annually for individual coverage or $8,750 for family coverage. If you’re 55 or older, you can add an extra $1,000 per year.

HSAs can improve your retirement planning

With people now living into their 80s and beyond, planning for health costs during a longer retirement has become crucial.

One smart strategy that many people miss is treating your HSA as a special retirement account just for health expenses. This means maximizing your HSA contributions while possibly paying some current medical bills out-of-pocket. Keep your medical receipts, as you can reimburse yourself from your HSA at any time in the future – even decades later.

Health expenses peak during retirement years

The key is investing your HSA funds for long-term growth. Many account holders don’t realize that HSAs can be invested like retirement accounts. Over time, this creates a tax-free pool of money specifically for future health needs.

Unlike most retirement accounts, HSAs have no required withdrawals during your lifetime. After age 65, HSAs become even more flexible – the 20% penalty for non-medical withdrawals disappears, though regular income tax would still apply to those withdrawals.

HSAs in estate planning

What happens to your HSA after death depends on who you name as beneficiary. If your spouse inherits your HSA, they receive all the same tax benefits and can use it as their own HSA.

For non-spouse beneficiaries like children, the tax treatment is less favorable and could create a significant tax bill. In some cases, it might be better to name your estate as the beneficiary.

The bottom line

Growing health care costs represent a major financial planning challenge. HSAs offer unmatched tax advantages for handling one of life’s biggest expenses. If you’re eligible for an HSA, it’s worth making it part of your financial strategy.

1. https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs

2. https://www.ama-assn.org/about/ama-research/trends-health-care-spending

3. https://www.irs.gov/government-entities/federal-state-local-governments/where-can-i-learn-more-about-health-savings-accounts-hsa-and-health-reimbursement-arrangements-hra