How to use your HSA as a retirement savings tool

We all incur medical expenses. They may be for small things, like Band-Aids or cough medicine, or larger ones— like prescriptions or therapy. Even if a treatment is covered by your health insurance, it likely comes with a co-pay and deductible.

A health savings account (HSA) allows consumers with a high deductible health plan to put away money for qualified medical expenses, from hearing aids to diagnostics to surgery. And because they're tax-advantaged, HSAs have also evolved into a great investment tool for retirement.

CNBC Select looks at how HSAs work, how you can open one and how to determine if they're right for you.

HSAs allow individuals with high deductible health plans to put away money for a broad range of medical expenses. The IRS has a comprehensive list of approved expenses but they include:

• medical imaging and tests
• prescription and over-the-counter medications
• surgery
• long-term care services 
• accessibility modifications to your home or car
• wheelchairs 
• eye exams, eyeglasses, contacts and laser eye surgery
• Dental exams and treatments, braces and dentures
• mental health care
• programs to address learning disabilities 
• smoking cessation
• acupuncture 
• fertility treatments 
• In-home nursing

HSAs are especially attractive to savers because they have a triple tax advantage:

1. Contributions go in pre-taxed. If you have an employer-sponsored HSA, the funds are deposited before any taxes are taken out of your paycheck. If you open an HSA on your own, your contributions can be deducted from your taxable income.

2. Funds grow tax-free in your HSA. You can let them accumulate nominal interest or invest the money in your HSA in stocks, bonds, ETFs, mutual funds and other securities, where it will earn a much higher return. If you need to pay a medical bill, you can sell investments. (Some HSA accounts require a minimum deposit outside of what you invest.)

3. You can withdraw money from your HSA tax-free. Money for qualified medical expenses can be withdrawn tax-free. Typically, if it's for some other use, you have to pay income tax and a 20% penalty. If you wait until age 65, however, you can make withdrawals for any reason without penalty. (If you use it for non-medical expenses, you'll be subject to income tax, similar to a traditional IRA.)

If you have an employer-sponsored plan, your HSA dollars are yours to keep when you leave your company. And any balance can roll over from one plan year to the next. This is different from a flexible spending account, which is a "use it or lose it" proposition.

Contributions to an HSA can also be used to pay for qualified medical expenses for a spouse or dependent child, even if they're not covered by your HDHP.

The IRS places an annual limit on how much you can deposit in an HSA.

• In 2023, the limit is $3,850 for individual filers and $7,750 for families, inclusive of any employer contributions.
• In 2024, the limit is $4,150 for single filers and $8,300 for families.

If you are over 55, you can deposit an additional $1,000 as a catch-up contribution.

Many people have an HSA through their workplace, and your employer may match your contributions or contribute a set amount. You can also open one through a bank like Bank of America, an investment firm like Fidelity or other HSA providers like Lively and HealthEquity.

However you open your HSA, there are some requirements:

• You must be enrolled in a qualified high-deductible health plan (HDHP)
• You may not be enrolled in Medicare or another non-HDHP plan
• You may not be claimed as a dependent

If you leave your employer and want to switch HSA providers, you can move funds from one account to another. There is typically a form to file and it may take a few weeks for the funds to transfer.

When you are comparing providers, consider these criteria:

Investment options

If you plan on investing your contributions, look at the options available at each institution.

"If you intend to use your HSA as a savings account and make withdrawals to cover medical expenses, you should invest in a lower-risk portfolio," Andrew Westlin, senior financial planner at Betterment, told CNBC Select. "If you intend to use your HSA as a retirement account and keep money invested long-term, you can afford to take on more risk."

Fees

Like any retirement account, an HSA may have monthly account charges and investment fees. These charges are often reduced or waived if you maintain a minimum balance (typically between $1,000 and $3,000) and some providers don't charge fees.

Payment and reimbursement options

Many HSA providers will issue you a debit card to pay for medical expenses, so check that a provider accepts these cards before ordering services or products. You an

You may also want to see if your HSA provider will allow you to be reimbursed, instead, and charge payments on a cash-back or travel-rewards credit card. Typically, you would submit a receipt to your provider and get reimbursed via direct deposit.

Account minimums

Some HSAs require a minimum deposit before you can start investing and a cash minimum that is always available and uninvested. A provider may require a $1,000 deposit before you can invest, for example, and $1,000 in cash. If you have $1,100 in that account, you could only invest $100.

If you have an HDHP, the tax benefits and investment opportunities from an HSA make it a tempting option. But review your current and long-term health situation before deciding.

"If you are someone that goes to the doctor regularly or can't afford your deductible out of pocket, a high deductible health plan and a HSA are not right for you," Westlin said. "But if you don't foresee many medical expenses and have a safety net or could meet your deductible with cash on hand, it may be a great fit."

At CNBC Select, we work with experts who have specialized knowledge and authority based on relevant training and/or experience. For this story, we interviewed Andrew Westlin, a senior financial planner at Betterment.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every investment article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of financial products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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