There's a reason health savings accounts, or HSAs, are often hailed as a terrific retirement-savings tool. Even though HSAs aren't meant for retirement specifically, they can serve as a savings plan for your senior years -- if you manage yours wisely. In fact, one key move on your part could really help you make the most of your HSA.
Don't tap your account for near-term expenses
What makes HSAs so valuable is that they're triple tax-advantaged. With an HSA, contributions are made with pre-tax dollars and withdrawals are tax-free, provided they're used to cover qualified healthcare expenses.
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Meanwhile, any HSA funds you don't need to withdraw immediately can be invested, the same way you can invest your IRA or 401(k) plan. And just like with Roth IRAs and 401(k)s, your investment gains will be yours to enjoy tax-free.
It's for this reason that it's a good idea to leave your HSA alone as long as possible, rather than take withdrawals for healthcare costs during your working years. If you constantly remove funds to pay for near-term medical care, you'll have less opportunity to grow your HSA into a larger sum. But if you leave your account alone for many years and pay for near-term medical expenses out of pocket, you might end up with a lot of money in your HSA by the time retirement rolls around.
In fact, let's say you contribute $3,000 a year, or $250 a month, to your HSA over a 30-year period. Let's also assume you manage to grow that money at an average annual 8% return, which is a bit below the stock market's average. If you don't take withdrawals from your HSA, but leave the funds alone for three full decades, you'll end up with about $340,000. That's a nice amount of money to cover your healthcare costs in retirement.
To be clear, once you enroll in Medicare, you can no longer contribute funds to an HSA. But you can absolutely use your existing HSA funds to pay for everything from Medicare premiums to deductibles to copays.
Another thing you should know is that if you take withdrawals from your HSA to cover non-medical expenses, you'll face a steep penalty -- but that only applies if you're under the age of 65. Once you turn 65, you can take HSA withdrawals for any purpose. And while you'll pay taxes on withdrawals that aren't healthcare-related, that's no different than the taxes you'd pay on withdrawals from a traditional IRA or 401(k) plan.
Put your HSA to work
Investing your HSA dollars and letting that money grow for many years is the best way to benefit from that account. As such, make sure to factor money into your budget for near-term medical bills and copays.
This isn't to say that you can never tap your HSA in a pinch if you wind up in the hospital and your paycheck can't cover your medical bills. And you definitely should not take on costly medical debt if you have funds sitting in an HSA. But as a general rule, you should plan on leaving your HSA alone until you retire so you can grow as much wealth as possible in that account.
