What Should You Actually Do With a $150K HSA in Retirement?
Episode 51
What Should You Actually Do With a $150K HSA in Retirement?
Published on Sept 9th, 2026
Episode Summary
Episode 51 of Retirement Tax Matters addresses how high-net-worth retirees in the $2M to $8M range should evaluate managing a six-figure Health Savings Account during retirement. Garrett Crawford, CFP® and Adam Reed break down the trade-off between saving an HSA for late-in-life tax-free compounding versus spending those funds earlier to pay qualified health expenses. The conversation examines the administrative hassle of maintaining decades of medical receipts, highlighting why trying to over-optimize account mechanics into your 80s can create unnecessary friction for adult children and healthcare powers of attorney. Garrett highlights the estate tax trap where leaving an unspent HSA to non-spouse heirs converts the entire balance into taxable ordinary income on a single tax return. The show also explores how large out-of-pocket medical bills exceeding 7.5% of Adjusted Gross Income allow high-expense retirees to offset taxable Traditional IRA withdrawals, preserving tax-free accounts for Medicare premiums and everyday healthcare costs. Ultimately, using an annual tax-return-driven framework helps retirees balance mathematical formulas with practical utility, aiming to bring their HSA balance near zero by the end of life.
Key Tax Planning Questions
Question 1: Is it better to spend or save a six-figure HSA in retirement?
The Health Savings Account is easily one of the most tax-efficient accounts in the tax code. Money goes in tax-free, grows tax-deferred, and comes out tax-free for qualified medical expenses. If you contributed through payroll while working, you even avoided FICA payroll taxes. Because of that triple-tax-free status, many high-net-worth retirees ask why they should touch their HSA early in retirement instead of letting it compound in equities as long as possible.
The strategy of holding an HSA until late in life usually relies on saving receipts for decades and reimbursing yourself down the road. While letting those funds compound in the market sounds great on paper, it may be more hassle than it’s worth. Keeping track of folders full of receipts for twenty years may be fun for you, but maybe not your spouse! On top of that, saved receipts do not adjust for inflation. A $2,000 medical bill you paid out of pocket in 2026 only gives you a $2,000 tax-free reimbursement in 2041, even though inflation has eroded the purchasing power of that cash. Congress has discussed targeting this “loophole” before, so you should understand the legislative risk you’re taking by going the extra mile saving these receipts for years.
While a surviving spouse can inherit an HSA tax-free, leaving an unspent HSA to adult children is not good financial planning. Under federal tax rules, an inherited HSA loses its tax-exempt status the moment it passes to a non-spouse heir. The entire balance becomes taxable ordinary income in a single tax year, which often lands right in your kids' peak earning years. This can and should be avoided.
I think the key with this question is determining the size of your HSA today, your age, how you are investing it, what your plan is regarding potential extended care costs…the list goes on an on! There isn’t one right way when it comes to spending now or later, but just because it’s one of the best retirement savings accounts in existence, doesn’t mean you shouldn’t start using it either. I generally fall into a camp that for many $2M-$8M retirees optimizing for dollars isn’t as high as optimizing for time and happiness. You might find yourself happier knowing you don’t have a pile of receipts to go through later in retirement.
Question 2: Can I use an HSA to pay long-term care insurance premiums?
I remember early on in my financial planning career when I first got access to professional financial planning software. After a couple weeks of using it, I quickly learned two things. (1) Inflation that is higher than anticipated for longer than expected can really derail a retirement plan. (2) An extended long-term care event lasting 10 years can wreck many retirement plans. While many wealthy retirees between $2M-$8M technically have the assets to self-insure for average extended care events, a multi-year health event can cause many choose to delegate that risk to an insurance company. If you are sitting on a six-figure Health Savings Account, it can be an intriguing idea to leverage that account to pay for LTC insurance.
The IRS allows you to use HSA funds tax-free to reimburse qualified long-term care insurance premiums up to annual age-based limits. In 2026, account owners between ages 61 and 70 can pay up to $4,960 per person per year out of an HSA tax-free, while those age 71 and older can use up to $6,200 annually.
Understanding how your policy is structured is critical when using an HSA for premiums. Traditional standalone long-term care insurance operates much like auto insurance: you pay an annual premium, and if you never need care, the money is gone. These older policies have also faced significant premium rate increases over the years. Because of that volatility, many retirees have begun to consider hybrid policies that combine long-term care coverage with a cash-value life insurance policy. Most hybrid plans lock in a fixed premium and include a tax-free death benefit for your heirs if care is never needed.
To use an HSA for a hybrid policy, the insurance company must provide a breakdown of LTC vs Life insurance for your annual premium. HSA dollars can only be used for the qualified long-term care rider portion of the premium, up to the IRS age-based limit. The remaining portion tied to the life insurance benefit must be paid out of pocket from personal cash flow. Pairing this itemized rider strategy with your Medicare Part B and Part D premiums gives you a reliable, multi-year plan to systematically spend down a large HSA without leaving an unspent balance behind.
Full Episode Transcript
Adam: Good morning, and welcome to Retirement Tax Matters. I'm Adam Reed. This is Garrett Crawford, our resident CFP® professional, and this morning we're diving straight into health savings accounts, or HSAs. Great topic, and I think surprisingly something we haven't talked about on an episode yet. Maybe we've touched on or mentioned it a time or two, but we have never done a deep dive on it, which is surprising since we love tax efficiencies and we should be loving HSAs. More HSA episodes are coming in the future. We're going to move to HSAs only, so you guys get excited for it.
No, but it really is a great account. One of the things I did want to mention right off the bat today as we jump into things is we're going to assume that people have a general understanding of HSAs, so we're not going to do a deep dive on what an HSA is or how it works. Instead, we're going to talk about it from a planning perspective: how it can impact people's lives, what it can be used for, how it can be inherited, and some of those higher-level concepts. We think this level 2000 class approach will be helpful for explaining what HSAs are and how they can be used in a financial plan.
To kick things off, Garrett, I hear from people sometimes saying, Hey, don't use your HSA. Save it as long as you can and kick that down the road. But from somebody that's doing a lot of financial planning and meeting with clients, what do you see as the mathematically optimized version of an HSA versus how it really plays out? How are people using these, and how can they benefit the people watching this episode who are in that $2 million to $8 million retirement range?
Garrett: I think where you ended that statement was where I wanted to start. Anytime I'm doing a podcast discussion like this, what I try to do each week is hop on the internet, specifically YouTube, and type in a phrase about health savings accounts. There are a lot of these videos out there, and I would bet for many of you, this is not the first video you've tuned into about health savings accounts. But the differentiator that we want to bring this morning is that a lot of our listeners fall into our niche, which is retirees with $2 million to $8 million.
If you've done well enough in life to get to that point, you've probably leveraged or taken advantage of health savings accounts since they've been around. I read this morning that they have been around since roughly 2012, so they're relatively new. But you've probably known about them, you've been contributing to them, and you might have a sizeable $100,000 to $200,000 in an HSA and you're asking, How do I leverage that?
When you go to YouTube and type this in, a lot of content starts with the shoebox method of receipt saving. There are a lot of videos out there about that, so we will start there, but then we're going to elevate that conversation more specifically to people of higher net worth and help you navigate that tension. Let's start with receipt saving because that is one of the things that comes up the most, and there is often tension when it comes to really large HSA balances.
Picture yourself with $100,000, $150,000, or maybe you're one of those super savers and really healthy people that have up to $200,000 in an HSA. You've got this tension in life because it's one of the best accounts ever created. That money went in tax-free, and it might have even escaped FICA payroll taxes. It grows tax-deferred like an IRA, but the key to an HSA is that if you use it for a qualified medical expense, you can pull that money out completely tax-free.
One of the unfortunate parts about life, Adam, is that health expenses are going to happen, and we're all going to pass away at some point: death and taxes. Expenses are coming, so a lot of times people, tax preparers, or planners say, Man, this is one of the best accounts ever, so I'm just going to let it grow and grow and grow. What we're going to talk about today is that while that is one way to think about it, I'm not saying everybody should abandon that plan. However, I want to present the idea of simplicity and using those funds earlier.
A writer I've read for years in the high-net-worth space wrote an article saying, I used to have a plan to save all this money, and then I switched and started spending it. It comes down to return on investment versus return on hassle. I think this shoebox receipt method falls into that return-on-hassle category. The idea is that you're going to continue to experience medical expenses through retirement. If you have other funds, such as a brokerage account that you can access cash-free, or maybe a pension where you aren't using all your monthly cash flow, you could pay for those medical expenses out of pocket. You and your spouse could allow that health savings account to continue to grow in the market, save the receipt, and later in life pull that money out tax-free even for non-medical expenses to reimburse yourself. It's a way to get around some of the penalties associated with an IRA, which some consider a tax loophole.
What's interesting is that in recent years, this practice has begun to get on Congress's radar, and they have discussed potentially limiting the receipt-saving method to a certain window of years. It hasn't passed yet, but the fact that it's on their radar means they might address it someday. If you spend your whole life leaning on that strategy and leveraging that tax planning loophole, hopefully they'll give you warning, but that's not guaranteed.
The question then becomes, Garrett, if I shouldn't wait and leave all that money untouched, what should I do with it earlier in life? We're going to talk about that, but the last thing I want to mention regarding saving receipts and letting an HSA grow for the rest of retirement is that we sometimes underestimate how things might not be as clear or easy to execute later in life. You have all this money growing in an HSA, and when your children are in their 60s, you might be telling them, Hey, I've got all those receipts in the kitchen cabinet, can you go look through those to make sure we don't pay extra taxes? Your kids might not want to deal with a cabinet full of receipts one day. Thinking through how to actually use that HSA balance is a crucial discussion for today.
Adam: One of the main topics that comes to mind when people think about health expenses in retirement is long-term care. Help us wrap our minds around what it looks like for somebody to utilize their HSA in retirement when planning for long-term care insurance. There are a lot of different methods to the madness: self-insuring through investable assets, purchasing a long-term care insurance policy, or utilizing the HSA. How does that work into the conversation as people think about long-term care?
Garrett: We could do a 20-episode podcast answering this question, but we'll try to condense it down. To give a little insight into Adam and me and the firm we work for, our roots are deeply tied to long-term care insurance. The owner of our firm and his partner have been helping people with long-term care insurance since 1993. They started their entry into financial services in the insurance space, so Adam and I benefit from having colleagues with over 30 years of experience who know as much about long-term care as anyone in the state of Tennessee. They've seen every pushback, where it works, and where it doesn't.
Extended care and long-term healthcare costs in retirement can possibly be the largest out-of-pocket expense you face. The challenge for many smart people is that not everybody stays in a long-term care facility for 15 or 20 years due to early-onset dementia where they are physically healthy but cannot care for themselves. Sometimes it's the other extreme where someone is diagnosed with something requiring long-term care, but they don't live long enough to fully benefit from the policy they paid into for years. Adam and I wouldn't stand here and say that everybody needs a long-term care insurance policy. In fact, in future episodes, we plan to bring in a colleague to answer some of these specific questions, so let us know in the comments if that would be interesting to you.
Adam: I had a conversation with a prospect yesterday who said, Hey, I've got a plan. I told them that's great, because you don't always need a long-term care insurance policy, but you do need a long-term care plan. Whether that means self-financing, selling an asset, or buying coverage, as long as you have a clear plan, that's what we are big fans of.
Garrett: If you want to talk about HSAs, you have to talk about how you're going to plan for long-term care. For a lot of our listeners, you may have a large $150,000 HSA. Generally, people fall into two camps. One person says, I've got enough money, I don't really believe in long-term care insurance, and I want to hold fewer insurance policies, so I'm going to self-insure my extended care. For them, using an HSA to pay a long-term care insurance premium has no appeal because they would rather accumulate and save those funds for expenses 20 to 25 years down the road. However, even with 15 or 20 years of growth, covering full long-term care costs purely out of an HSA can be very challenging.
To put numbers to this, you can look up current cost estimates online through resources like CareScout (formerly Genworth). Looking at projection estimates 15 years out to the year 2041 for a market like Nashville, home healthcare is projected to cost about $9,790 a month. An assisted living community with a private one-bedroom is estimated at $10,366 a month. At the most expensive level, a nursing home semi-private room is estimated at $15,863 a month, and a private room is estimated at $18,547 a month. Those numbers can be hard to believe, but inflation drives these costs up over time.
Because long-term care planning can be so expensive, your HSA alone might not cover all of it. On the flip side, if someone doesn't feel comfortable absorbing all that risk on their own and wants to bring in an insurance company to supplement costs, you can use distributions from your HSA to pay for qualified long-term care insurance premiums tax-free.
The IRS does set annual limits on how much HSA money can be used tax-free for long-term care premiums based on your age. For example, in 2026, if you are between ages 51 and 60, you can use up to $1,860 out of your HSA for that policy. For the age bracket between 61 and 70, you can use up to $4,960 per year tax-free. If you are 71 or older, that limit is $6,200 per year. You always want to verify these limits with your CPA annually.
If you have a very large HSA, your ability to make a dent in that balance through casual medical spending might not be as fast as you think. Paying annual long-term care premiums out of the HSA can be a great way to tax-efficiently leverage those funds and protect your broader portfolio.
Adam: My dad always jokes that he wants his last check to bounce. He says he wants to be efficient and spend everything he saved. I tell him, Dad, that's easy, just write me a big check. But for most people in the $2 million to $8 million wealth space, that isn't what happens. There are usually leftover funds, and the HSA is often one of those accounts with a remaining balance. What does it look like to inherit an HSA? We talk a lot about how Roth IRAs and step-up in basis for brokerage accounts are favorable for heirs, but how does an HSA work when passed to a spouse, child, or another beneficiary?
Garrett: The short answer is that an HSA is a terrible asset to inherit if you are a non-spouse. If you are married and your spouse passes away, the HSA transfers to the surviving spouse tax-free with no issue. However, if an HSA is left to a child or a non-spouse beneficiary, the entire balance becomes immediately taxable as ordinary income in the year of death, which is far from ideal planning.
To add context, after age 65, you can pull money out of an HSA for non-medical expenses without the 20% penalty, though it is subject to ordinary income tax. In that sense, after age 65 it functions similarly to a Traditional IRA. Because of the harsh inheritance rules for non-spouses, you are incentivized to spend down the HSA balance during your lifetime or potentially designate a charity as the beneficiary. Planning the spend-down of an HSA is imperative so that the account balance is intentionally drawn down rather than leaving a tax burden to non-spouse heirs.
Adam: Before we get to our last question, a quick reminder to check out the link below for retirementtaxmatters.com. We have a year-end tax planning checklist available. It's that time of year to sit down, run income projections, and evaluate how much of your HSA or other accounts you should strategically use.
Garrett: It's a nostalgic time of year. While some people love getting a pumpkin spice latte or wrapping up in a blanket to watch the leaves change, we love looking at spreadsheets and income tax projections.
Adam: It sounds like a lot of our viewers enjoy doing the exact same thing. Downloading that checklist can be your fall activity, joining over 500 people following along with our weekly content.
Back to our last question: for retirees who still plan to save their HSA and stash it away, what thoughts do you have regarding itemized medical deductions and how they come into play during later years of high medical expenses?
Garrett: If you have a $150,000 HSA today and let it grow untouched for 20 to 25 years with the plan to self-insure long-term care, consider what happens if a major medical event actually occurs. Significant medical expenses can exceed 7.5% of your Adjusted Gross Income (AGI). If you itemize deductions, medical expenses exceeding that 7.5% threshold can drastically reduce your ordinary taxable income. We often see that in a person's final years of care, their taxable income drops significantly due to large itemized medical deductions combined with property taxes and charitable giving.
If your taxable income is already dragged down to a very low tax bracket due to high medical deductions, using a tax-free HSA asset to cover those expenses might not provide the maximum tax benefit. Instead, that low-tax environment might be the ideal time to withdraw funds from a Traditional IRA that has been growing tax-deferred, since those withdrawals would be taxed at minimal rates.
Because of this, you don't always have to perfectly optimize the HSA equation by hoarding it forever. It is completely reasonable to use HSA funds earlier in retirement to pay for Medicare Part B, Part D, or IRMAA premiums. You can also consider using HSA funds for qualified long-term care insurance policies or hybrid policies that offer tax-free benefits or a tax-free death benefit for heirs, rather than leaving a taxable HSA balance behind.
Adam: At the surface level, people view HSAs simply as tax-free accounts for medical expenses, but there are nuances like the 7.5% AGI itemized deduction threshold and non-spouse inheritance rules. In our industry, almost every good financial tool sits in the middle of a minefield, and our goal is to help you navigate it properly. We love making these videos to help guide you through those decisions. Thank you for following along. I'm Adam Reed, this is Garrett Crawford, CFP® professional, and this is Retirement Tax Matters.