Assumptions: Maximum family contribution, inflated ~3%/yr ; 10% annual investment return; all contributions invested at the start of each year. Tax savings assumes a 35% federal rate and a 9.85% state income tax rate. Tax rates can change based on which state you live in and your income. Rates can also change if new tax law is passed. By Year 20, the HSA is over $676,000 (while total contributions over 20 years were about $230k). About $430,000 of that is pure investment growth – never taxed along the way. This is a hypothetical example - return is not guaranteed, and you can lose money while investing.
A Quick Note on Investments: Why did we choose an aggressive, 100% stock fund for this hypothetical scenario? In this strategy, the assumption is you won’t touch the HSA for years, effectively making it part of your long-term retirement portfolio. Since the HSA will eventually cover medical costs in retirement, think of it like an IRA meant to pay healthcare – and you likely want it as large as possible by then.
A high-stock fund allocation maximizes long-term return potential - but does add additional risk and volatility. As always, you could choose a more balanced allocation per your risk tolerance, and you will want to factor in your specific circumstances when making an investment allocation.
Of course, investing involves risk and market fluctuations. It is possible that your investments could decline in value at the exact moment you need to use the funds. Be aware of all the risks and talk to your trusted advisor when making these allocations. Not sure how to invest? At TruMix Advisors, we help our clients navigate investing their HSAs.
Additional Tax Savings: If your income is higher, it's possible you're in the 37% federal income tax bracket, meaning this strategy is even more impactful. Regardless of your income bracket, any HSA contribution made through payroll also avoids FICA taxes (for Social Security and Medicare). Those two rates are currently 7.65% and .09% respectively. A high-income earner in the state of MN, for example, could be saving over 55% in taxes! (37% federally, 9.85% state, 7.65% Social Security, and 0.9% Medicare)
How an HSA turns into a "Horizon" HSA
Pay Medical Expenses Out-of-Pocket:
A critical element of the “Horizon HSA” strategy is to leave the HSA money untouched for as long as possible. That means paying current medical expenses with other funds, not your HSA. Ideally, you can use a rewards credit card to pay doctor bills, prescriptions, and other qualified expenses. As a bonus, using a cash-back credit card (often ~1-2% back) effectively gives a small discount on those expenses. It’s not huge, but it’s free money for paying out-of-pocket.
Why do this? Paying out-of-pocket allows the HSA to remain invested and growing. Think of it as making a tax-free loan to your future retirement: you cover costs now, letting the pre-tax HSA dollars grow, and later you’ll “repay” yourself from the HSA without tax.
Important Notes:
- Only pay medical expenses with a credit card if you can pay off the card in full – you do not want to incur interest; that would defeat the purpose.
- Ensure you keep some cash for immediate needs until you’ve built a buffer elsewhere. You might keep the first year or two of contributions in the HSA cash account (or contribute only after paying bills) so you don’t have to sell investments to cover an unplanned large medical bill.
- Once you have other savings to cover surprise expenses, you can fully invest new HSA contributions for growth.
- This approach requires discipline (not touching the HSA for a long time) and excellent record-keeping. If you’re likely to raid the HSA early or hate managing receipts, it may not be for you.
- This plan also works best if you have lower medical costs. If you have expensive, ongoing medical costs and a very high deductible, this plan may be less advantageous.
Keep Documentation of Every Medical Expense: For every medical co-pay, dental or vision bill, prescription, etc. that you pay outside the HSA, save the receipt. Maintain a spreadsheet with the date, amount, provider, and description of each qualified medical expense you paid out-of-pocket. Additionally, you should keep a folder of EOBs and receipts of medical expenses paid on your own.
This record-keeping is absolutely crucial.
The reason is that HSA funds can be withdrawn tax-free to reimburse any qualified medical expense incurred after the HSA was established – even if the expense was years or decades ago. There is no time limit on when you can reimburse yourself.
For example, if in Year 3 you pay $200 for a dental procedure out-of-pocket, you can hold onto that $200 receipt. In Year 20 (or Year 30!), you could withdraw $200 from your HSA, tax-free, to “pay back” that old expense – even though you actually paid it long ago. The HSA rules simply require that (a) the expense was qualified and incurred after you opened the HSA, and (b) you haven’t already been reimbursed for it (you can’t double-dip). With good records, you might accumulate tens of thousands of dollars in unreimbursed medical expenses. These become the basis for tax-free withdrawals later.
In your tracking spreadsheet, have a running total of your unreimbursed expenses. This figure represents how much you could take from the HSA tax-free at any time. It’s motivating to see it grow, and it will help with planning your withdrawals later. For instance, you might realize by age 60 that you’ve got, say, $100k of cumulative receipts – so you might start withdrawing, $20k a year for five years to use it up.
If audited, you must prove that any HSA withdrawals you claimed as tax-free were indeed for qualified medical expenses. The IRS can ask for receipts for any expense you reimbursed from the HSA, even those from many years ago. If you cannot produce proof, the withdrawal could be reclassified as taxable (and if you were under 65 at the time of withdrawal, subject to a 20% penalty).
Ensure Expenses are Qualified: Not every health-related cost is HSA-eligible. Generally, expenses that would count as deductible medical expenses on a tax return (IRS Publication 502) are qualified for HSA spending. This includes most medical, dental, vision services, prescriptions, etc. Insurance premiums are not qualified except for specific cases (like Medicare premiums, long-term care premiums up to limits, or COBRA premiums). So, for example, elective cosmetic surgery or general wellness items might not qualify. Be sure the receipts you save are for legitimate HSA-qualified expenses. When in doubt, consult Publication 502 or a CPA/tax advisor.
No “double-dipping”: If you have already been reimbursed by insurance or an FSA for an expense, you cannot also reimburse yourself from the HSA. Likewise, if you deduct a medical expense on your tax return (unlikely for most, since you’d need to exceed the AGI threshold for itemizing medical expenses), you can’t also use HSA funds for it. In practice, if you’re doing this HSA strategy, you won’t be deducting medical expenses on Schedule A because you’re paying them with pre-tax HSA contributions. Just make sure each expense is only paid once – either by insurance, FSA, HSA, or yourself – not multiple times.
Exception – true hardship: If a medical expense is so large that paying out-of-pocket would force you into debt or financial strain, then of course, use the HSA if needed. The strategy assumes you have the cash flow to cover medical costs from income or emergency funds. It’s most feasible for high earners who can cash-flow medical bills. If that’s not the case, you can still invest a portion of your HSA and try to leave it untouched, but always take care of near-term needs first.
Tax-Free Income Stream in Retirement: By following this plan, you effectively turn your HSA into a stealth retirement account for medical costs. Come retirement, you will have two things: (1) a large HSA balance invested, and (2) a collection of saved receipts for all those years of out-of-pocket medical expenses. At that point, you can start submitting those old expenses for reimbursement from your HSA. The HSA will send you funds (or you transfer online) for the amount of the receipts – and that withdrawal is completely tax-free as it’s a qualified medical reimbursement.
It doesn’t matter that you’re now withdrawing years later; the IRS only cares that the expense was eligible and incurred after the HSA was established.
Example: Suppose over 20 years you accumulated $50,000 of medical receipts (not unusual for a family). Your HSA grew to $600k+. In retirement, you could pull, say, $50k from the HSA this year and mark it as reimbursement for those past expenses. You’ll pay no tax on that $50k – it’s completely tax-free income.
Income Flexibility: You don’t have to withdraw all unreimbursed expenses at once. In fact, you can schedule reimbursements strategically. You could reimburse, say, $10k per year for five years, or whatever pattern suits your needs. There’s no requirement to ever withdraw for old expenses – the money can stay in the HSA as long as you like, even for your heirs – but it’s there for you when needed.
Keeps taxable income low: Because HSA reimbursements do not count as taxable income, using them in retirement can help you manage your income levels. For wealthy retirees, this has several benefits:
- Avoiding higher Medicare premiums (IRMAA): Medicare Part B and Part D premiums rise if your income exceeds certain thresholds (the IRMAA surcharges). Tax-free HSA withdrawals do not count as income in these calculations. So funding some of your retirement spending via HSA reimbursements (instead of IRA withdrawals) can help keep your modified adjusted gross income below those IRMAA thresholds, saving you potentially thousands in Medicare surcharges.
- Roth conversion window: If you retire before 65 or have a gap before RMDs, you may plan to do Roth conversions at a lower tax bracket. Keeping your living expenses funded by tax-free sources (like HSA reimbursements, brokerage accounts, or cash on hand) means your taxable income stays low, leaving room in lower brackets to convert traditional IRA money to Roth at a favorable rate. Essentially, HSA withdrawals won’t use up your “tax bracket space.”
- Access before 59½: Most retirement accounts penalize withdrawals before age 59½. HSA funds used for qualified medical expenses have no such age restriction. If you retire early (say at 54) and have no penalty-free access to IRAs yet, the HSA can act as an income source. This can provide income in early retirement without tapping other retirement accounts too soon. (Note: You still shouldn’t withdraw for non-medical reasons before 65 – that carries a 20% penalty. But thanks to past receipts, you have plenty of medical reasons to withdraw.)
- Use for future medical expenses: In addition to reimbursing past bills, remember you can also use the HSA for future medical costs tax-free. In retirement, you’ll likely have ongoing medical needs: Medicare premiums, supplemental insurance, co-pays, long-term care, etc. After age 65, you can even use HSA money to pay Medicare Part B, Part D, or Medicare Advantage premiums tax-free (this is a qualified expense). You might want to keep some of the HSA for those future costs. This means even after you’ve cashed out your saved receipts, the remaining HSA can cover your medical budget each year – all tax-free withdrawals. Essentially, your medical expenses in retirement become prepaid from years ago, and the earnings that paid for inflation in healthcare over time were never taxed.
- Plan for beneficiaries: If you’re married, your HSA can pass to your spouse (they become the owner and can use it normally). If you’re single and leave an HSA to a non-spouse, it will be taxable to them (HSA loses its tax-free nature at that point). So it’s usually optimal to use most of the HSA during your lifetime (or leave it to a spouse who can then use it). This strategy aims to do just that – use the HSA fully for medical needs (past or present). If you find you’ve accumulated more in HSA than you have qualified expenses for, after age 65 you can still withdraw the excess for non-medical needs; you’ll just pay income tax (similar to a traditional IRA withdrawal). There’s no 20% penalty once 65. So there’s little downside to having “too much” in your HSA – worst case, it behaves like an IRA at the end. Best case, all of it gets used tax-free.
After Using the “Backlog” of Expenses: Once you’ve eventually reimbursed all those saved receipts (perhaps by your late 60s or 70s), you will still have your HSA (likely with plenty of funds still invested, given ongoing growth). At this stage, you can simply use the HSA like a normal retiree would:
- Pay any new medical expenses directly from the HSA card – tax-free as always.
- Use it for Medicare premiums (direct withdrawal or reimbursement to yourself).
- Consider long-term care expenses or premiums (there are annual limits on LTC insurance premiums that count as qualified).
The HSA effectively becomes a super-flexible medical spending account in your later years. Every dollar will still be tax-free for health needs, which typically increase with age. And if you somehow still have HSA money in your estate that you didn’t need for medical costs, that means you successfully sheltered that much more from taxes for a very long time. It will be taxable to heirs (unless to a spouse), but you still benefited from decades of tax-free growth.
In Summary
The “Horizon HSA” strategy boils down to this: contribute the max, invest it aggressively hoping it will grow over time, don’t spend it now, and save all your receipts – then enjoy a tax-free windfall in retirement. It leverages the HSA’s unique triple tax advantage to the fullest. High-income earners like doctors, attorneys, or executives benefit the most, turning high current taxes into zero future taxes. Your future self – relaxed in retirement with a healthy HSA balance and a folder full of receipts – will thank you!