The monthly account statement for your investments is deceptive. The balance listed doesn’t take into account any taxes you may owe when you sell that investment.

And taxes can take a serious bite of your savings.

Any money invested in traditional 401(k)s and traditional individual retirement accounts (IRAs) will be taxed at your ordinary income tax rate when you make withdrawals in retirement.

Money in a regular taxable account may also trigger a tax bill. The gain on any investment you sell within a year will be taxed at your income tax rate. A gain for an investment you owned for at least 12 months is eligible for the long-term capital gains tax. That’ might be just 10 percent to 15 percent depending on your income, but it’s still a haircut.

If you’re looking for a tax-smart way to invest, a health savings account (HSA) should be at the top of your list.

An HSA offers three tax breaks:

• Money you contribute each year is tax-deductible.

• Savings inside your HSA compound without any tax bills.

• When you withdraw money from an HSA to pay for a qualified medical expense you will owe no tax.

With an HSA your balance is not a mirage. What your account statement says you have saved up is exactly what you have to spend on qualified medical expenses. There’s no tax bite.

HSA as an investment

To be eligible to invest in an HSA you must be enrolled in a high deductible health plan (HDHP). You can then open an HSA and make contributions to the account. If your health insurance is through work, your employer may also kick in some cash for your HSA, raising its appeal even more.

You can always use the money in your HSA to cover current health care costs. Or you can make it your goal to tuck money into your HSA and leave it untouched for a few years…or decades. The triple tax break on an HSA makes it a powerful retirement investment strategy.

Given our increasingly long life expectancies—and the ever-rising cost of medical care – it’s estimated that anyone 65 years old today will need more than $150,000 to pay for out-of-pocket retirement health care expenses over a retirement that can span 20 years or more.

If you plan to pay those costs from a traditional retirement account, you will likely need to pull out a sum that is at least 20 percent more than what you need to cover the bill. For example, let’s say one year you have an illness or injury that runs up your out-of-pocket costs to $10,000. Depending on your income tax bracket (for federal, and where applicable state income tax too) you would likely need to withdraw at least $12,000 to $13,000 to net the $10,000 after factoring in the tax bill.

Moreover, if you need to pull out a lot of money from a traditional account, you could end up pushing your taxable income for the year into a higher tax bracket, compounding your tax bill.

If you instead have the flexibility to pay big medical out-of-pocket bills from your HSA savings there will be no tax bill.

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