When it comes to retirement savings, most people use commonly known accounts such as a 401(k) and an IRA. These can be great accounts to invest in, as they provide tax breaks and -- in the case of a 401(k) -- may come with employer-matching contributions.
However, there's also another retirement savings account that offers even better tax breaks in some situations, and unfortunately, many people aren't familiar with it. And if you're eligible for this account but are not using it, that could be a huge mistake.
Here's what it is.
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Don't overlook this fantastic retirement savings account
One of the best retirement accounts is often overlooked, mainly because it's not actually called a retirement account. In fact, it's called a Health Savings Account, or HSA.
HSAs are intended to be used to help people with high-deductible health plans cover the costs of medical care with pre-tax dollars. If you have a qualifying high deductible plan, you're allowed to invest in it, and you can deduct the money you invest from your taxes just like a 401(k) or IRA.
There are a few things that make HSAs special, though.
First and foremost, you don't have to use the money you invest right away. You can invest it and let it grow tax-free. Then, if you use the money for qualifying healthcare expenses, you can withdraw the funds without being taxed on them. This is different from a 401(k) or an IRA. With those accounts, you pay taxes on withdrawals. It's also different from a Roth IRA or Roth 401(k) because while you can take tax-free withdrawals from those retirement plans, you don't get to contribute with pre-tax dollars.
This makes an HSA the only account where you get tax breaks when you invest, enjoy tax-free growth, and can take tax-free withdrawals. The triple tax benefits make it a really powerful account. You can put money in each year that you have a qualifying high-deductible plan, invest the money and let it grow, and then take out the contributions and profits without ever paying a dime to the IRS.
How can you use an HSA as a retirement account?
Now, you're probably thinking that it all sounds great, but wondering how you can use it as a retirement plan.
The most obvious way is to invest in it and take money out of it to cover healthcare costs as a retiree. With the average retiree spending upwards of $150,000 on healthcare out-of-pocket during the course of their retirement, a lot of the HSA funds can go toward these costs, so retirees benefit from the triple tax break.
But there's also another rule that makes an HSA a great retirement account. Once you turn 65, you can take money out of an HSA for any purpose penalty-free -- although you will be taxed at your ordinary rate. So, if you don't have a lot of medical expenses as a senior, you can still use your money, and it will simply be taxed just like a 401(k) or IRA would. This means you have a lot of flexibility in how you use the funds.
If you are eligible for an HSA based on your health plan, you should be investing in it to help you save for retirement so you can enjoy the unique perks this account offers. Get started today.
