When we think of retirement plans, the usual suspects come up: employer-offered benefits like 401(k)s and SIMPLE IRAs or personal accounts like IRAs or Roth IRAs. However, some overlook another account when planning for their future: The workhorse that is a Health Savings Account (HSA).
An HSA is a tax-advantaged savings account that account holders can use to pay for medical expenses, offering discounts on many health and medical-related purchases. And although an HSA can absolutely be used as a traditional savings account, an HSA particularly shines when account holders use their HSA to hold interest-generating investments like individual stocks, mutual funds, and ETFs.
HSAs were designed to help alleviate costs that fall under the deductible of high deductible health plans. Right now, an HSA-eligible high deductible plan means a minimum deductible of $1,400 for individuals and $2,800 for families.
If you're eligible, you can open an HSA at your preferred administrator, or if they offer it, you can sign up for your employer-sponsored HSA. An employer-sponsored is a particularly attractive option if your employer pledges to match your contributions, similar to how they would with a 401(k). A study by the Employer Benefit Research Institute (EBRI) found that accounts that received an employer contribution had higher total contributions and were more likely to invest their funds. Investing with an HSA can dramatically change account balances over time, making it a key feature in saving for the future.
Here's why you should consider adding an HSA to your retirement arsenal:
Harness the power of triple-tax advantages
One of the primary benefits of an HSA is its triple tax advantage: HSA contributions are either pre-tax (if an employer offers the account) or tax-deductible (if you opened your own), and you don't pay taxes on the account's growth (which is why it's a great tool for investing in high-yielding stocks, ETFs, and mutual funds). This means that you lower your tax liability while simultaneously growing your funds for the future, tax-free.
And since an HSA is specifically designed to help you save on eligible medical expenses, you don't pay tax on any withdrawals used to pay for qualified purchases. Withdrawals are also available anytime, unlike an IRA or 401(k). That way, you can invest, save, and spend all while enjoying tax benefits that last a lifetime.
And unlike other plans like Flexible Spending Accounts (FSAs) or Health Reimbursement Accounts (HRAs), an HSA is 100% yours—meaning that you take it with you, no matter who your employer is. This is true even if your employer offered your HSA. It's your account. Your savings.
Grow your savings with investments
Although many people use an HSA as purely a savings account, it would be a mistake not to tap into its other features. Keep in mind that any growth your HSA generates is tax-free. Therefore it would be a waste not to consider creating a diversified portfolio of investments geared towards long-term growth. Whether that means investing in index funds, stocks, bonds, ETFs, or a combination of many assets—use your HSA like any other retirement-oriented investment account.
Strategically lower your tax burden with reimbursements
Unlike 401(k)s or IRAs, you don't have to wait until you've reached a certain age to withdraw funds penalty-free. As long as you're withdrawing funds for medical expenses and wellness-related costs, an HSA will make those funds available to you penalty-free in the form of tax credits you can claim.
But it gets better: Because you can claim those credits at any time, even years after you made the purchase. You can tailor when you choose to have Uncle Sam reimburse you, which means you can strategically plan and lower your tax burden down the line if you think you may end up in a higher tax bracket. This kind of flexibility allows you to prepare for multiple financial scenarios in retirement.
Max out contributions before you turn 65 and reap the benefits
According to a 2019 study by Healthview Services, a 65-year-old couple in good health will need $387,644 to pay for healthcare for the remainder of their lives. The HSA is the perfect account to help you prepare for these costs early. If you meet the maximum contribution limit each year ($3,600 for individuals and $7,200 for families), you can really reap the benefits once you hit retirement.
By the time you've turned 65, your HSA will turn into a traditional retirement account, not unlike an IRA. At that point, you can withdraw—penalty-free—from your HSA for any reason, including non-medical ones (although you will have to pay taxes on those withdrawals). But you know what will still be tax-free for the rest of your life? Withdrawals for medical expenses. Plus, all of your everyday health and wellness purchases will remain eligible for tax deductions. That means that as you grow older and probably have more health-related expenses, you'll rest easy knowing that your HSA has your back and that you're benefiting from major savings while prioritizing your health.
HSAs also have a little bonus for those nearing retirement: Although HSAs have yearly contribution limits, those who are 55 and older are allowed an annual "catch-up" contribution of an additional $1,000 pre-tax.
An HSA's benefits really shine as time goes on, making it a perfect tool for retirement planning. If you're eligible, looking into an HSA and making sure you're using it to its fullest potential can help you get to that sweet, sweet retirement life all the quicker.
