IRAs and 401(k)s are often what comes to mind when you think about retirement savings accounts, but there's actually a third option a lot of people tend to overlook: a health savings account (HSA). While it was originally created to help people pay for their medical expenses, the tax breaks it offers make it a smart place to stash some extra money for your retirement, too.

HSAs are gaining popularity among younger adults, but older adults have been slower to adopt them. Only 8% of those in their 60s and 4% of those in their 70s report using an HSA, according to a TD Ameritrade survey, compared with 16% and 15% of 40- and 50-somethings, respectively.

Some of this difference may be because HSAs haven't even been around two decades yet, and once you're on Medicare, you're no longer allowed to contribute to them. But if you're not enrolled in Medicare yet, you should definitely take a closer look at an HSA.

Mature couple looking at laptop

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What is an HSA?

An HSA is a special type of account that enables you to set aside money for medical expenses. Money you contribute to an HSA reduces your taxable income for the year, and if you use the money on qualifying medical or dental expenses, you won't pay any taxes on it at all. You can also use the money for non-medical expenses if you want, though you'll owe taxes if you do and you'll pay a 20% penalty if you're under 65.

Unlike a flexible spending account (FSA), you don't have to use all your HSA funds by the end of the year. You can leave the money in your account as long as you need to, and it'll roll over from one year to the next.

What makes an HSA even better than other retirement accounts is that you aren't forced to take required minimum distributions (RMDs) from your HSA at 72, like you are with all your other retirement accounts except Roth IRAs. So you're able to leave the money in there for as long as you want.

Individuals may contribute up to $3,550 to an HSA in 2020, and families may contribute up to $7,100. Adults 55 and older are allowed an extra $1,000 in catch-up contributions. These contribution limits may change from one year to the next, so you should check on them every year if you plan to store money in your HSA.

If your employer offers an HSA, you may be able to elect to defer a percentage of your income to it, just like you can to a 401(k). If you open an HSA on your own, you can make contributions according to your own schedule. Some HSA providers enable you to invest your HSA funds in order to help your money grow more quickly, just like your retirement savings. This is worth considering if you plan to leave the money in your account for a long time.

Who can open an HSA?

Anyone with a high-deductible health insurance plan can open an HSA. This is defined as one with a deductible of more than $1,400 for individuals or more than $2,800 for families. If you're not sure how much your deductible is, check with your health insurance provider.

As I mentioned above, you also cannot be enrolled in Medicare if you would like to open a new HSA. But if you already have an HSA, you can still use the funds that are already in your account after you enroll in Medicare. The 20% penalty for using your HSA funds for non-medical expenses goes away at 65, though you'll still have to pay income tax on these withdrawals. 

How do you open an HSA?

Your employer should be able to provide you with information on how to open an HSA if it offers one as part of your employee benefits. If it does not, you can open an HSA at many banks and with some investment companies, like Vanguard, or credit unions. You'll likely need some form of identification to show your HSA provider and a little money to open your account with.

Before you open an HSA, do some research on the company's costs and services. If you want to invest your HSA funds, make sure your HSA provider allows this. You should also ask about account fees and whether your provider will waive these fees if you maintain a certain balance and whether you get checks or a debit card to access your funds. You'll want to make sure you can manage your account online, too, but most HSA providers should offer this.

It's worth considering an HSA if you qualify for one and you can spare a little cash every year. The contribution limits aren't high compared with other types of retirement savings accounts, but its tax advantages are something you won't find with any other account.