If you have the ability to contribute to a Health Savings Account, you probably know that HSAs can be a great way to cover your healthcare costs. You need only to be covered by a High Deductible Health Plan to be eligible to contribute, making such accounts come in quite handy for medical expenses.
Beyond that core use, though, Health Savings Accounts can play an additional role in helping you fund your retirement. Indeed, HSAs are massively underrated when it comes to serving as retirement accounts. Here are three reasons why.
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1. They're triple-tax-advantaged
You can contribute to a Health Savings Account with pretax dollars. Money inside your HSA can then compound tax-deferred. When withdrawn for a qualified medical expense, there are no taxes on your withdrawals. That's an incredibly powerful 1-2-3 punch, and the triple advantage is one of the absolute best benefits of contributing to an HSA.
2. You can reimburse yourself for qualifying out-of-pocket costs later
One of the lesser-known benefits of an HSA is that you don't have to directly pay your medical expenses from that account. As long as the HSA was established before you incurred the cost, you can pay the cost out of your own pocket, and then pay yourself back from that account later.
This can be incredibly useful when it comes to using the HSA to support your retirement. Because you need a high-deductible health insurance plan to fund an HSA, you'll likely be paying all of the charges for the health-care services you use at the beginning of each year. That can add up to a pretty hefty amount over the course of a career, especially if you have a family to support.
If you pay out of pocket while you're earning money, but only reimburse yourself for those costs after you're ready to retire, you can have a big chunk of tax-free money available to you whenever you need it. That can be useful, for instance, if you're planning to retire early, and can't yet efficiently tap money from more typical retirement plans.
It can also be useful if you're trying to control your taxable income in retirement, to enable strategies like rolling traditional retirement accounts into a Roth IRA. If you can cover your conversion taxes and your living expenses without generating additional taxable income, you can get your traditional retirement savings accounts into a Roth much more efficiently.
3. You can withdraw from your HSA for any purpose once you turn 65
Once you turn 65, you can tap your HSA for any purpose, not just to cover your healthcare costs. If you use it for a non-qualifying purpose once you've reached that age, you'll pay income taxes on the withdrawal, but you won't pay any additional penalties on top of that.
In that respect, your HSA can act similarly to a traditional IRA, but with a couple of key advantages. For one, your HSA has no Required Minimum Distribution within your lifetime. For the other, your HSA still allows completely tax-free distributions for qualified medical expenses, no matter what your age is.
Since healthcare costs tend to rise as we age, having a decent chunk of tax-free money to cover those costs can be incredibly helpful.
Get started now to take advantage of your HSA
An HSA can be an incredibly powerful tool in your retirement planning toolkit, but it's one that works a lot better the earlier you start to plan around it. Annual contributions are limited to $3,850 if you're only covering yourself or $7,750 if you're covering a family, with an additional $1,000 catch-up contribution for those age 55 or older who are otherwise eligible to contribute.
Those limits -- plus the need to cover your initial healthcare costs each year out of pocket to keep your money compounding -- make it very important to plan ahead to get the most out of your HSA. So get started now, and give yourself your best chance of benefiting from this massively underrated retirement account.
