You're probably familiar with 401(k)s and IRAs even if you don't have these accounts. They're some of the best places to put away money for your retirement, but there's one other account that deserves a place among the top retirement savings vehicles, though it remains critically underutilized.

The health savings account (HSA) wasn't intentionally designed as a retirement savings account, but its tax advantages make it well suited to the task nonetheless. Approximately 77% of respondents in an August Charles Schwab survey said their employer offers an HSA, but only 45% report actually using theirs. If you've been ignoring your HSA up until now, here's a look at why you may want to reconsider that.

Smiling man holding handful of $100 bills

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How a health savings account works

Health savings accounts are a special type of account designed to help people cover their medical expenses. They're only available to those who have a high-deductible health insurance plan -- one with a deductible of at least $1,400 for an individual or $2,800 for a family in 2020. Some companies offer one as an employee benefit, but you can also open one up with a bank or brokerage on your own as long as you have a qualifying health insurance plan.

Your employer may allow you to defer a portion of your paycheck to your HSA like you do with retirement savings if it offers an HSA to its employees. Otherwise, you can just transfer money to your own HSA whenever it's convenient for you. Your HSA provider may give you checks or a debit card you can use for withdrawing funds when you need them.

If you plan to use your HSA for retirement savings, you should look for a provider that will enable you to invest your HSA funds. Your investment options will vary depending on your account provider, but many enable you to choose from a variety of mutual funds and exchange-traded funds (ETFs) or even individual stocks. Investing in these things can help you grow your savings much more quickly than you could if you just left the money sitting in a savings account.

Benefits of a health savings account

HSA contributions reduce your taxable income for the year, just like contributions to traditional IRAs and 401(k)s. If you use the money for qualified medical, dental, or vision expenses, you won't pay taxes on it at all. The key word here is "qualified." Elective procedures, like cosmetic dentistry and plastic surgery, don't count. But medically necessary surgeries and routine dental care do count.

The real benefit for retirement savers kicks in at 65. You're allowed to withdraw your HSA funds for nonmedical purposes at any time, but if you're under 65, you'll pay taxes on it, plus a 20% penalty. The penalty disappears at 65, though you'll still owe taxes on nonmedical withdrawals. This makes your HSA more like a traditional IRA with the added benefit of tax-free medical distributions. 

HSAs also aren't subject to required minimum distributions (RMDs) like most retirement accounts. These are mandatory withdrawals you must take annually beginning when you turn 70 1/2 if you reached this age prior to 2020, or at 72 if you'll reach this age in 2020 or later. Because HSAs don't have them, you can leave your money in your HSA as long as you want, rather than withdrawing it when you don't need it and dealing with a larger tax bill because of it.

HSA contribution limits

You're allowed to contribute up to $3,550 to an HSA in 2020 if you have an individual health insurance plan or up to $7,100 if you have a family plan. Adults 55 and older may contribute up to $1,000 more in catch-up contributions. These limits are pretty low, so an HSA probably isn't sufficient as most people's sole retirement savings vehicle, but it's a great place to put some extra cash once you've gotten your 401(k) match through your employer, if you're offered one, or maxed out your IRA. 

It's fine to use your HSA funds to cover a medical emergency if one arises, but if you were counting on these funds to cover some of your expenses in retirement, you may have to increase your retirement contributions moving forward to make up for what you've withdrawn.

HSAs aren't available to everyone, but if your company offers one, it's worth considering, especially if you're looking for a place to stash some extra retirement savings this year. Just make sure you understand the rules so you don't accidentally cost yourself money.