There are several tax-advantaged accounts available that can help you save for retirement. A health savings account, or HSA, is one of the best options available.
While an HSA may not sound like a retirement account, it can be used as one. And it has some significant benefits, compared with other options such as a 401(k) or an IRA.
Despite the unique advantages an HSA provides, the majority of workers who have access to one through an employer don't actually take advantage of it. And they're losing out on a top-tier retirement savings opportunity.
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Millions of Americans are missing a chance to save
According to a recent survey conducted by Schwab, almost 8 in 10 workers are offered access to a health savings account at work. Yet just 49% of employees actually make use of it.
HSAs are open to people with qualifying high-deductible health plans. The ostensible purpose of them is to help defray the costs of medical care. Workers can opt to have money taken from their paychecks and put into their HSAs, up to annual contribution limits, and can withdraw the money any time for medical care.
But HSAs are more than just a way to pay for medical care. They're a great retirement savings account because you don't have to use the money you put into them in the year of your contribution. You can invest it and allow it to grow for as long as you'd like.
Eventually, as a senior, you could withdraw the funds to pay for medical care if you want. But you also have the option to make penalty-free withdrawals for any purpose after age 65. Just keep in mind, you'll still have to pay taxes on any withdrawals not used for medical expenses.
An HSA is great for retirement savings
HSAs aren't just top-tier savings accounts because you can use the money for anything you want later in life. After all, that's true for other investment accounts, as well, such as 401(k)s and IRAs.
There's a really good reason why health savings accounts are one of the best investment accounts to save for your future. These accounts provide better tax benefits than any other tax-advantaged investment plans, including traditional or Roth IRAs or 401(k)s.
With traditional and Roth IRAs and 401(k)s, you must choose when you want to claim a tax break. You can invest with pre-tax dollars in traditional accounts, but the money you withdraw as a senior is taxed at your ordinary income tax rate. With Roths, the opposite is true. You can make tax-free withdrawals, but can't invest with pre-tax funds.
With HSAs, you get to do both. You can claim a deduction for HSA contributions in the year they're made. And if you use the money for qualifying medical expenses, the money can also be withdrawn tax free. No other account provides this option -- which is why it's such a shame the majority of people offered an HSA don't use one.
If you don't end up using your HSA money for medical expenses, you are taxed at your ordinary rate for withdrawals as a senior (just as you would be with a traditional 401(k) or IRA account). But at worst, that means that your HSA provides the same benefits as a 401(k) or IRA.
Since estimates suggest a typical senior couple could end up spending around $295,000 throughout retirement on out-of-pocket medical expenditures, there's a very good chance that you will be able to use your HSA for medical care and get the extra tax benefits.
If you're one of the millions of Americans with access to an HSA who isn't taking advantage of it, now might be the time to change that so you can put this top-tier retirement account to work for you.
