Funding an HSA as a Retiree: A Tax Savvy Long-Term Care Strategy

If you’ve hung around stwserve.com for any amount of time at all, you’re probably aware that I am a self-proclaimed Health Savings Account (HSA) Evangelist, and there’s a couple of reasons for that:

• I love the triple-tax savings benefit of HSAs. You put the money in on a pre-tax basis, taking a current year tax deduction, the money grows in the HSA tax-deferred, and when you pull the funds out for eligible healthcare expenses, you pay no tax at all on the basis or the growth!
• I love the time flexibility and liquidity provided by these accounts. You can access the funds in your HSA now or in the future, for qualified healthcare expenses, totally tax-free.
• I love the practicality of these accounts. healthcare costs have generally increased over time. It might make sense to set aside a portion of your money in an account earmarked for healthcare costs that provides you with additional tax savings.

All of that said, it’s important to acknowledge that HSAs do have their downsides. For one, they don’t transfer well to non-spouse beneficiaries at all. While a spouse can inherit an HSA with no tax consequences and continue to treat the account like their own, a non-spouse beneficiary who is inheriting will have the HSA cashed out in full immediately, with all of the proceeds being taxable to them in the current tax year. Yeah, that’s a pretty bad deal.

Also, the ability to fund an HSA comes with the requirement to opt for a high-deductible health plan (HDHP), which may not be the best move for individuals with chronic illnesses or young families whose kids need frequent doctor’s visits.

All things considered, though, if you are relatively healthy and have minimal doctor’s visits throughout the year, aside from your annual physical, funding an HSA may be a beneficial planning strategy for some individuals. And while we talk a lot about federal employees funding HSAs during their working careers, there’s one group of people who are eligible to fund HSAs who are often overlooked: federal retirees.

Okay, okay. I know what you’re thinking: Katelyn, as a retiree, I’m more worried about pulling money out of my investment portfolio to pay for healthcare than I am concerned about putting money into my investments to save for my healthcare. That’s logical. Hear me out, though.

The earliest Minimum Retirement Age (MRA) for a federal employee is age 57 (with at least 30 years of service). And 57 is so young in the grand scheme of things! Even if we look at the age most Feds can retire with the enhanced 1.1x FERS pension multiplier, that’s still only 62 (with 20 years of service). Still very young, considering the average life expectancy in the U.S. is 81 for females and 76 for males! If you’re a healthy retiree with enough extra cash flow to cover medical expenses out of pocket, it could make a lot of sense to spend your early years in retirement saving to an HSA… and taking a current year tax deduction while doing so.

This is particularly true if you’ve undersaved to your HSA throughout your career.

I get it. Many of us have kids, and, boy, those little buggers are expensive. When you’re mid-career, making less money, with young kids, money just seems to evaporate. But don’t neglect an opportunity to play a little “catch up” in those early retirement years.

As a federal annuitant, you have the ability to change your FEHB plan during each annual open enrollment period (typically running from November through December each year). If you select an HSA-compatible FEHB plan, you can fund an HSA with up to $4,400 per year for an individual coverage plan and $8,750 for a family coverage plan.  The dollars contributed to your HSA will serve as an “above the line” deduction on your current year tax return, potentially lowering your overall taxable income. In the HSA, your contributions will grow tax-free, and be accessible to you at any time, penalty-free, for qualified healthcare expenses.

Oh, and did I mention that after you reach the age of 65, you can access the funds in your HSA penalty-free for any expense, healthcare-related or not?
(Importantly, federal and state taxes do still apply to withdrawals after age 65, but essentially after reaching this age, the account functions similarly to that of a standard Traditional IRA, notably without the requirement to make Required Minimum Distributions.)

If all of this doesn’t have you interested in at least looking into whether funding an HSA as a federal retiree could be part of your overall financial planning strategy, let me share an important statistic with you. According to consulting firm Milliman’s “2025 Long-Term Care Index” study published in January of this year, the average cost of long-term care is $98,000 for men and a approximately $171,000 for women. If you’re wondering about the discrepancy in the figures between the genders, that’s because women tend to live longer than men on average. As a result, ladies, we face a double whammy of needing care for a longer period of time, and being less likely to have a spouse available to assist us for free at the time we need care.

Don’t base your long-term care strategy on the national average, though. Financial planning is best when it’s personalized. Check out this tool by CareScout to calculate the current cost of long-term care in your zip code.

Cool tool aside and back to my central point: wouldn’t it be great to do your homework on saving for long-term care and get a tax break for it? Enter: the HSA. As a federal retiree, you can use your HSA to save for future potential long-term care expenses, taking a current-year tax deduction for your HSA contributions, and then access the HSA funds years to pay for qualified long-term care costs (and long-term care insurance premiums, by the way), which are generally tax-free when distributed for qualified expenses. What do I mean by qualified long-term care costs? That includes everything from professional nursing care, home health care aide services, and therapeutic services in an assisted living facility.

Now, you may be thinking: Katelyn, I hear you that funding an HSA might be a savvy planning move, but I’m already in my 60s… realistically, how much is money that I’m contributing late in the game going to grow before I need it?

I’m so glad you asked, reader.

Let’s assume you retire at age 62, with family healthcare coverage under an HSA-compatible high-deductible healthcare plan. You save the maximum allowable contribution of $8,750 to your HSA for 8 years, you invest the money in the HSA (a very important step), and the money grows at a rate of 6% per year. By age 70, you have $86,602.84 in your HSA. You have taken tax deductions totaling $70,000 over the 8 year period, and you have just over $16,000 in potentially tax-free growth to be used to fund long-term care expenses. Pretty good, right?

But we’re not done calculating the value of this strategy yet. The University of Colorado estimates the average age for entering a formal long-term care facility is between 83 and 85 years old. Let’s assume it’s 83, for the sake of our example. So, we funded the HSA between 62 and 70, and then between ages 70 and 83, the money just sat there, with nothing being added or distributed. Again assuming a 6% rate of return, by age 83, the HSA balance would be $184,717.64, with a further $98,114.80 in growth being added in the 13 years when the account was just sitting there. If these funds are used for qualified long-term care expenses, there is effectively no tax due on these funds.

In summary, we invested $70,000 into the HSA, for which we too current year tax deductions; we accumulated a total of $114,717.64 in tax-deferred growth on that investment, and we can access 100% of these funds tax-free if we allocate them towards qualified long-term care expenses.

For some individuals, this may represent a valuable planning opportunity.

It’s important to remember that long-term care planning is just one part of your overall financial plan. All decisions should be made with an understanding of the wider context of your financial plan. If you’re interested in discussing this strategy to learn whether an HSA could be right for you, feel free to reach out to the team at [email protected] for a complimentary financial planning consultation.

**Written by Katelyn Murray, CFP®, ChFEBC®, FBS®, CFT-1™, ECA. The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Katelyn Murray and not necessarily those of RJFS or Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy suggested. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment or financial decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. **