IRAs are great places to stash your retirement savings because they're open to just about anyone, and they give you a lot of freedom to invest your money how you choose. But they have one major drawback: their low contribution limits. In 2023, you can only set aside up to $6,500 in one of these accounts if you're under 50 or $7,500 if you're 50 or older.
That might not be enough if you hope to save a large sum and lack access to a workplace retirement plan. But there might be another way for you to keep saving. However, not everyone qualifies for it.
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It's time to think outside the box
Traditional retirement accounts, like 401(k)s and IRAs, are most people's first choice for retirement savings. But if you're eligible for a health savings account (HSA), this is also a great place to stash your savings.
HSAs are primarily intended to hold medical savings, but they can also serve as retirement accounts, thanks to their triple tax advantage. Money you put into an HSA reduces your taxable income for the year, and it grows tax-free. You can also make tax-free medical withdrawals at any age.
These accounts allow nonmedical withdrawals as well, though you pay a 20% penalty on these if you're under 65. And you'll also pay taxes on these, no matter your age. But if you wait until you're old enough to avoid the penalty, it functions more or less like a traditional IRA -- with the bonus of tax-free medical withdrawals.
It's not an option for everyone
Before you get too excited, you should know that not everyone can open an HSA. They're only available to those with qualifying health insurance plans. That's one with a deductible of at least $1,500 for an individual plan or at least $3,000 for a family plan in 2023. If you don't have one of these, you may have to explore other options, like a taxable brokerage account, to house some of your retirement savings.
Check your health insurance plan to verify what its deductible is if you're not sure whether you qualify. And keep in mind that the qualification requirements change over time. In 2024, only those with individual health insurance plans that have a deductible of $1,600 or more or family plans with a deductible of $3,200 or more may contribute to an HSA.
How to get started
If you think an HSA is the right choice for you, your first step is to open an account. Many banks offer these accounts, but you want to look for a company that enables you to invest your HSA funds so they'll grow like the funds in your retirement account. A lot of well-known brokers offer these.
Opening the account is similar to opening any other financial account. You'll need to provide some personal information, including your name, contact information, and Social Security number. You may also need an initial deposit to open the account.
Once it's set up, you can contribute funds on a schedule or as you have them available. You're allowed to set aside up to $3,850 in 2023 if you have a qualifying individual health insurance plan or $7,750 if you have a qualifying family plan. These limits will rise to $4,150 and $8,300, respectively, in 2024. And in both years, adults 55 and older may add an extra $1,000 to their annual contribution limit.
Don't forget to choose your investments as well. Your options will vary, depending on what your account provider offers. Some may have tools to help you select your investments if you're not sure what to choose yourself.
Finally, though you're free to withdraw the money for medical costs at any time, it's best to avoid this if you hope to use the money for retirement savings. Otherwise, you could set yourself back. And be sure to review your eligibility, contribution limits, and investment options every year to make sure you avoid penalties and get the most out of your account.
