Many people struggle to contribute any money at all to an IRA or 401(k) plan. If you're currently maxing yours out, consider yourself ahead of the game. But what if you still have the financial leeway to sock money away for the future? Are there other accounts that offer tax benefits comparable to what you'll find in an IRA or 401(k)?

Thankfully, there's one account in particular that, believe it or not, offers superior tax benefits on the road to building long-term wealth: the health savings account (HSA). If you qualify to contribute to one, it pays to take advantage.

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How HSAs work

An HSA is a hybrid savings and investment account. With an HSA, you can contribute funds to cover near-term medical expenses, but any money you don't need right away can be invested and carried forward into the future. In fact, HSA funds never expire, so you can use one of these accounts to build retirement wealth during your working years.

HSAs are also triple tax-advantaged:

  • Contributions are tax-free
  • Investment gains in your account are tax-free
  • Withdrawals are tax-free as long as they're used to cover qualified medical expenses

Here's another great feature of HSAs: If you're under 65 and withdraw funds for nonmedical purposes, you'll be hit with a 20% penalty, but once you turn 65, you can remove funds from an HSA for any reason and avoid that penalty entirely. The only catch is that your distributions will be subject to taxes, but the same would hold true for distributions taken from a traditional IRA or 401(k). In fact, if your healthcare expenses in retirement are ultimately lower than expected, you can effectively treat your HSA like your IRA or 401(k).

Can you fund an HSA?

HSA participation hinges on enrollment in a high-deductible health insurance plan, so not everyone will qualify. In 2021, you'll need an individual deductible of $1,400 or more, or a family deductible of $2,800 or more, to contribute.

If you do qualify, you'll be allowed to put in up to $3,600 on your own behalf, or up to $7,200 on behalf of your family. If you're 55 or older, you'll get a $1,000 catch-up as well.

Let's say you're 35 years old and already maxing out your regular retirement plan. If you were to put $3,000 a year into an HSA over the next 30 years, and your HSA investments were to deliver an average annual 7% return (a bit below the stock market's average), you'd wind up with over $283,000 to use in retirement -- assuming that you don't take withdrawals along the way. When combined with your regular savings, that sum could set you up quite nicely as a senior. If you're eligible for an HSA, be sure to sign up. Many people participate in HSAs through their employers. If that's not an option, but your health plan qualifies, you can open one independently and start reaping the benefits.