How to Fix Costly Mistakes and Turn Your Health Savings Account into a Wealth Powerhouse

The Health Savings Account (HSA) is often called the most powerful retirement account available—and for good reason. It offers a triple tax advantage: contributions go in pre-tax, the funds grow tax-free, and qualified withdrawals come out tax-free.

But if you’re approaching retirement, say in your 50s or 60s, mishandling this account could cost you big time in taxes, lost growth, and missed savings.

Let’s cover three common mistakes pre-retirees make with their HSA and how to fix them. You can check out my YouTube video on this topic here.

Mistake 1: Not Maxing Out Contributions While You Still Can

Many pre-retirees think, "I'm almost done working, why bother funding my HSA account now?" This is a costly oversight.

• The Problem: Once you enroll in Medicare at age 65 (for most people), you are no longer eligible to contribute to an HSA. Contributions are your golden ticket to immediate tax savings. Skipping this means leaving free money on the table, especially if your employer offers a contribution or a match.

• The Fix:

  • Review your budget today and find room to contribute.

  • Automate contributions directly from your paycheck. Doing this allows you to save extra on payroll taxes, maximizing your immediate benefit.

Mistake 2: Treating Your HSA Like a Checking Account for Current Expenses

This is the most common mistake: dipping into your HSA for every doctor visit, prescription, and medical expense as they occur. While this is allowed, it misses the entire point of the account's long-term potential.

• The Problem: HSAs are not just savings accounts—you can invest those funds for growth. Using the funds early means you are sacrificing decades of potential compounded growth, making a withdrawal now far more expensive in the future.

• The Solution:

  • Pay out of pocket for current medical expenses if you can afford it.

  • Let your HSA investments grow tax-free.

  • Save all your medical receipts (preferably electronically). You can later reimburse yourself for these expenses tax-free in retirement, providing a flexible source of tax-free cash decades down the road.

Mistake 3: Failing to Invest the Funds for Growth Over Time

Leaving a large HSA balance in cash is a massive blunder, especially given the rising cost of healthcare.

• The Problem: With healthcare costs skyrocketing in retirement (potentially $300,000 or more for a married couple), your HSA funds need to at least keep up with medical inflation (which historically outpaces general inflation). Leaving funds in cash creates a major risk of inflation eroding your purchasing power—it’s like watching a melting ice cube.

• The Fix:

  • Assess your risk tolerance. If retirement is 5 to 10 years or more away, allocate a mix of assets (from conservative to aggressive) that match your timeline and provide growth potential.

  • Transfer Providers: If your current HSA administrator only offers low-yielding cash, transfer your funds to a provider that offers access to a full range of investment options (stocks, bonds, ETFs).

The Power of the HSA

Fixing these three mistakes can supercharge your HSA into a retirement powerhouse. Remember, after age 65, you can withdraw funds for non-medical needs penalty-free (though it will be taxed like a traditional IRA).

• The Largest Account I’ve Seen: I've personally seen a client HSA valued at $300,000. Imagine that much tax-free money available just for healthcare!

Implementing these fixes today ensures your HSA protects your health and maximizes your wealth in retirement.

At Barrett FP LLC, we offer expert financial planning on an hourly basis, focused entirely on helping you achieve your goals.

Learn more about how we can help you integrate your HSA into your total tax and retirement plan and see if we're a good fit.