I’ve written previously about the incredible opportunity of using your HSA as a stealh retirement account (for those who can afford to do so). More recently, I wrote about a variation on that strategy for folks who were not maxing out their Roth contributions. Today’s post is about a strategy that some very early retirees could use to move money from their pre-tax retirement account to their HSA account.
Here’s an example of how this might work (based on a real person’s situation). Jackie (not their real name) is a single woman in her mid 40s who has accumulated enough in their investment portfolio to retire (or at least stop working full-time). Jackie needs about $50,000 to live on each year (after tax). In 2026 she decides to fund her spending with $26,000 from her pre-tax account1 and $26,000 from her taxable brokerage account (with $13,000 of that being long-term capital gains). She will end up owing $990 in federal taxes (10% marginal tax rate, 0% capital gains tax rate) and $1,008 in Colorado state income taxes (4.4% flat rate), leaving her with $50,002 in after tax money to spend. So far, so good.
1You might be wondering how Jackie can pull from her pre-tax accounts before age 59.5. There are at least four ways. The first (and best), is if Jackie is lucky enough that her pre-tax investments are in a 457b plan (because there is no penalty to withdraw funds before age 59.5 as long as you’ve left your employer). The second (and worst) way is to simply pay the 10% penalty (but you still come out ahead if you were in a higher marginal tax bracket when you contributed). The third (more complicated, but doable) way is use a 72(t) IRA. The fourth (but with a 5-year lag) is to use a Roth Conversion ladder.
Jackie needs health insurance whether she’s doing this strategy or not, and that’s already included in her $50,000 in spending needs. She will get it through the ACA marketplace. Her MAGI is $39,000, which means she’s at about 250% of the Federal Poverty Level (2026 numbers), which means her premiums are capped at 8.44% of her income ($3,292/year or $274/month). She will likely get a Bronze or Silver plan. All Bronze plans are now HSA-qualified and many Silver plans are as well. In 2026, she can contribute up to $4,400 to her HSA, but that wasn’t included in her $50,000 in spending needs. So here’s the strategy: do an HSA “Conversion”2.
2Note that while a Roth Conversion is an actual thing that is recognized by the IRS, an “HSA Conversion” is not. I’m just borrowing the language because it functions very much like a Roth conversion, except with a Roth conversion you pay taxes on the conversion amount from your taxable accounts but with this “conversion” you do not.
Instead of taking $26,000 out of her pre-tax account, take $30,400, and then contribute the extra $4,400 into her HSA. The contribution to the HSA completely offsets the extra withdrawal from her pre-tax account, so this has no tax consequences – she pays the same amount of taxes as previously indicated. But now that $4,400 is sitting in her HSA instead of her pre-tax account, which has several advantages (and one disadvantage). Just like when it was in her pre-tax account, the money can be invested and grow tax-free. But when she eventually withdraws it from her HSA it will be tax-free as long as it’s for qualified medical expenses (whereas withdrawals from her pre-tax account would be taxed at her marginal tax rate at the time of withdrawal).
Some folks worry that they may accumulate too much in their HSA and not have enough qualified expenses to eventually withdraw from it. In this “worst” case scenario (which is actually a fantastic scenario because it means you’ve had very few health issues), there’s an easy out. Because after age 65 you can withdraw money from an HSA even without qualified medical expenses and just pay tax on it (no penalty). So in all likelihood you will be able to withdraw the $4,400 (plus significant growth over time) tax free for qualified medical expenses, but if there is a portion of it that you don’t have qualified expenses for you can withdraw it and simply pay tax – which is exactly the same situation as if it was still in the pre-tax account. So you have greater tax flexibility because at least some of it will be tax free, and for whatever (likely small) amount might not be, it’s a wash3. It also has an additional benefit of lowering your eventual RMDs, although it’s hard to tell how helpful that will be this far in advance.
3Some folks might argue that the non-qualified withdrawals may not be a “wash” if you end up being in a higher marginal tax bracket after age 65. That argument would be that while you didn’t pay tax on the “conversion” because you contributed it to the HSA, you are still effectively paying the 10% marginal tax rate on the conversion amount because you could have contributed to the HSA from your taxable accounts (and saved the 10% in taxes on the contribution amount). If you think of it that way, then if you end up in a higher marginal tax bracket after age 65 for any non-qualified withdrawal, then you end up paying more in taxes. I’m not worried about this both because I think most people will have plenty of qualified expenses so they can withdraw it all tax free, and because the situation as described doesn’t have any taxable money available to contribute to the HSA,
But I do agree that if there is taxable money available to do this, that could be a better choice (depending on the respective balances in pre-tax and taxable as well as other factors). In that case, you could think of this as a Taxable to HSA “conversion”, and that would be an excellent strategy as well.
The one possible downside to this strategy is you can only access money in your HSA for non-qualified expenses after age 65 without paying a penalty. If you leave the money in your pre-tax account then you can access it at any time using any of the four strategies listed previously and then have complete access to it at age 59.5. For the amount of money involved and the time frame until you hit 65, I don’t see that as much of a limitation.
Obviously this is somewhat of an edge case, because most folks are not in the position to retire very early4. But for those who are, this is definitely a strategy I would suggest you consider. You are effectively “converting” pre-tax money to no-tax (or at least mostly no-tax) money, lowering your future potential tax burden, and decreasing future RMDs.
4To be clear, you do not have to be a very early retiree to do this, any retiree at any age can. It’s just that’s it’s most likely to be advantageous to someone who has managed to retire very early and can keep their taxable income very low. That’s how you get the most benefit from this strategy.
Fisch Financial 