If you search the internet for retirement savings advice, you'll generally hear things along the lines of "save as much as you can without wrecking your near-term quality of life." And that's reasonable advice.
The truth is, there's really no such thing as having too much money in retirement. You never know what your expenses will look like and just how rampant inflation will be. And if you wind up with excess funds in your various retirement accounts, you could always do things like donate to charity or help better the lives of the people you love (for example, help pay for your future grandchildren's college degrees).
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When it comes to building retirement savings, IRAs and 401(k) plans tend to get top billing. But there's another account you may want to use for retirement savings purposes in addition to an IRA or 401(k). And it's one that may offer you even more benefits.
Don't miss out on an HSA
Health savings accounts, or HSAs, don't tend to get as much attention as they should in the context of retirement planning. But if you have a health insurance plan that's compatible with an HSA, it pays to participate in one.
A big reason people are advised to save in accounts like IRAs and 401(k)s is for the tax benefits. The nice thing about HSAs is that they combine the benefits of traditional and Roth retirement plans as follows:
- HSA contributions are made with pre-tax dollars
- HSA withdrawals are tax-free when used for qualifying healthcare expenses
- HSA balances can be invested, and those gains are tax-free
Now to be very clear, an HSA is not a retirement account in that you don't have to save the money for retirement specifically. There's no such thing as an early HSA withdrawal penalty. The only penalty you have to worry about is a non-medical withdrawal penalty, which you should try to avoid since it'll cost you 20%.
But HSA funds have no time restrictions. If you fund an HSA this year, you could withdraw the money a few months later to cover medical bills that pop up. You could also keep that money invested and save it for retirement, when your healthcare bills might be even larger.
It's for this reason that it's more than fair to call an HSA a retirement account, even though it's not limited to retirement by any means. And remember, since that money gets to grow tax free, the longer you carry a balance forward, the more you might gain.
There's an extra dose of flexibility with HSAs
Another reason to use an HSA as a retirement account? We just talked about avoiding a 20% penalty for non-medical withdrawals. But once you turn 65, that penalty goes away completely.
What this means is that if you end up with a very large HSA balance -- more so than what you need to cover your medical expenses -- then starting at age 65, you can use your money for any purpose without a penalty.
Non-medical withdrawals will be subject to taxes, so that's something to plan for. But otherwise, you can look at your HSA as a dedicated source of healthcare savings in retirement, and as a backup IRA or 401(k) if you end up with a lot of money.
All told, it's important to look at an HSA as a key retirement savings account. It's also a good idea to check your eligibility every year to see if you qualify to participate in one. Funding an HSA could do your future self a world of good if you manage that money strategically.
