Saving for retirement is something I'm pretty seriously committed to these days. Although I'm not particularly close to retirement age, I'm at an age where most of my friends' parents are retired or really close to it. And I can see how financially stressed a lot of them are.
I don't want to end up in a similar boat. I'd rather make some sacrifices today, like driving an older car and living in a home that's fine but not as spacious as I'd like, to have the ability to sock money away for retirement savings purposes.
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There are a number of different accounts I'm using for my retirement savings. Since I'm self-employed, I'm able to contribute to a solo 401(k), so I have some money in there. I also have an IRA, plus funds in a taxable brokerage account.
The reason for the latter account is that IRAs and 401(k)s impose costly penalties for accessing your savings prior to age 59 1/2. I'm not sure I want to retire early, but I'd like to keep the option open. I feel that it's necessary to keep some funds outside of a restricted account so I can access my money at any time.
But of all the different accounts I'm using to save for retirement, there's one that I happen to like more than any other. And there are three big reasons why.
A single account with three different tax breaks
Ever since my family enrolled in a high-deductible health insurance plan, I've been contributing money to a health savings account, or HSA. What I love about these plans is that they offer three distinct tax breaks:
- Contributions go in tax-free
- Invested funds get to enjoy tax-free growth
- Withdrawals are tax-free when used to pay for qualified medical expenses
You may believe that an HSA isn't a retirement account since you don't have to wait until retirement age to withdraw funds. And that's absolutely true.
You can withdraw from an HSA at any age, as long as you have a qualified healthcare expense to cover. And those run the gamut from copays to see the doctor to medications.
But I've specifically decided that my plan is to not touch my HSA prior to retirement. Instead, I make a point to keep money in a regular savings account for surprise medical bills. That way, I can leave my HSA invested and allow that money to grow tax-free so that by the time retirement rolls around, I'll ideally have a pretty decent-sized balance to tap.
There's no such thing as having too large an HSA balance
Some people might argue that if you leave your HSA untouched until you reach retirement age, you'll risk ending up with too much money for healthcare savings. First, I'd argue that that's a good thing because it's better to have more money than less. I'd also point out that Fidelity estimates the cost of healthcare throughout retirement is $157,500 for a single person aged 65 today.
But also, one lesser-known HSA rule is that once you turn 65, you can take a withdrawal from one of these plans without paying penalties. In that situation, the only thing you'll have to worry about is being taxed on your withdrawals. But that's no different than having a traditional IRA or 401(k).
That's yet another reason I love my HSA. At some point, HSAs effectively convert to a traditional retirement savings account that you can use for any purpose. So if your health plan is compatible with an HSA, I would strongly encourage you to fund one. It might end up doing a lot of good for your retirement if that's what it's earmarked for.
