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48% of Millennials and Gen Z'ers are investing for retirement through this account — and no, it's not a 401(k) or IRA

A Charles Schwab report indicates that Millennials and Gen Z'ers are investing in HSA accounts.

Maki Nakamura | Digitalvision | Getty Images

Contributing to a 401(k) or Roth IRA are common ways to start preparing for living expenses in retirement, but they aren't the only strategic way to build a nest egg.

According to data from the Charles Schwab 2022 401(k) Participant Study, 48% of Millennials and Gen Z'ers who are offered the option to contribute to a Health Savings Account (HSA) choose to do so. This move is motivated by the desire to start saving for healthcare-related expenses in retirement.

A Fidelity Investments report estimates that a 65-year-old couple retiring in 2022 can expect to spend an average of $315,000 in healthcare and medical expenses in retirement. While this estimation accounts for the highly inflationary environment we've experienced, Fidelity's findings still indicate that Americans grossly underestimate what healthcare expenses will be in retirement; the average person expects to spend just $41,000.

HSA accounts were designed to allow individuals with a high-deductible health plan (HDHP) to easily save money for medical- and health-related expenses. However, an HSA can also strategically be used to save money for retirement, in conjunction with a 401(k) or IRA account.

The tax advantages of an HSA account

With an HSA account, there are three main tax advantages accountholders can take advantage of. The first is that your contributions come straight out of your paychecks pre-tax, similarly to a 401(k). Those contributions can either sit in the account and interest or be invested within the HSA.

The second tax advantage is that all growth of your HSA funds are tax-free. So if you invest in an S&P 500 index fund and the funds grow in value, that growth is not taxable. And the third tax advantage is that you can withdraw the funds from your HSA tax-free for qualified medical expenses at any age. However, if you wait until age 65 you can withdraw funds for any reason. There are no penalty fees to do so, but the funds will be subject to income tax, similar to a traditional IRA.

How an HSA can help in retirement

Having an HSA to float medical expenses means you can use your money from your Roth IRA and 401(k) to cover other expenses in retirement. And because of the tax advantages of the HSA, you won't pay a tax on your account growth and if you use withdrawals for medical expenses, you won't pay a tax for that either.

And, of course, your HSA account can also be another income reserve if you end up going through your other retirement savings quicker than expected. Again, if you use your withdrawals for anything other than medical-related expenses, you'll be taxed on your withdrawals, but this extra cushion can help you extend your ability to afford day-to-day expenses in retirement.

Who is eligible for an HSA?

Before you can invest in an HSA, you need to meet the following requirements:

  • Must be covered under a qualified high-deductible health plan (HDHP)
  • May not be covered under any health plan that is not a qualified HDHP
  • Must not be enrolled in Medicare (the healthcare component of the Social Security program)
  • May not be claimed as a dependent on another individual's tax return

You should also keep in mind that if your strategy is to use your HSA for expenses in retirement, then opening an HSA account may be most advantageous to those who don't expect to have many medical expenses and can afford to pay their deductible with cash on hand. This way, more of your money can grow as much as possible for use in retirement.

If an HSA doesn't sound like the right fit for you, you can still prepare for retirement by continuing to contribute to your 401(k) and investing money in a Roth IRA through robo-advisors like Betterment and Wealthfront or a traditional broker like Charles Schwab or Fidelity. Robo-advisors give you a hands-off approach to investing by taking into consideration your investment time horizon, risk tolerance and financial goals to pick the right assets for you.


  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. For example, Betterment doesn't require clients to maintain a minimum investment account balance, but there is a ACH deposit minimum of $10. Premium Investing requires a $100,000 minimum balance.

  • Fees

    Fees may vary depending on the investment vehicle selected, account balances, etc. Click here for details.

  • Investment vehicles

  • Investment options

    Stocks, bonds, ETFs and cash

  • Educational resources

    Betterment offers retirement and other education materials

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  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. $500 minimum deposit for investment accounts

  • Fees

    Fees may vary depending on the investment vehicle selected. Zero account, transfer, trading or commission fees (fund ratios may apply). Wealthfront annual management advisory fee is 0.25% of your account balance

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  • Investment vehicles

  • Investment options

    Stocks, bonds, ETFs and cash. Additional asset classes to your portfolio include real estate, natural resources and dividend stocks

  • Educational resources

    Offers free financial planning for college planning, retirement and homebuying

Terms apply.

Bottom line

An HSA can be a strategic way to make sure you have additional income in retirement, especially if you'll need to spend a lot on medical expenses later on. Of course, before you contribute you'll want to make sure you have an emergency fund and make sure you're eligible to invest in an HSA. Even if an HSA isn't the right fit for you, you can still prepare for retirement through the use of other accounts, like your 401(k) or Roth IRA.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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