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How to Use your HSA for Retirement

4 min read

30 sec brief

Taking care of your older self is likely one of the primary reasons you are socking away money in retirement accounts such as 401(k)s and Individual Retirement Accounts (IRAs).

Taking care of your older self is likely one of the primary reasons you are socking away money in retirement accounts such as 401(k)s and Individual Retirement Accounts (IRAs).

Medicare will cover a big part of your retirement health care costs, but retirees typically pay for about 30 percent of medical costs out-of-pocket. Over a long retirement, those expenses can add up. One estimate is that a retired couple today with typical medical expenses might need they will be able to pay all their health bills.

A health savings account (HSA) is a valuable way to save money today that you can use to help pay for retirement health care costs. The tax breaks on an HSA account are even better than the tax advantages of 401(k) and IRA accounts. 

HSA: The only triple tax-free way to save for retirement

With 401(k)s and IRAs there is always a tax bill. You just get to choose when you pay.

When you save in a Traditional 401(k) or IRA you get an upfront tax break. Your contributions reduce your taxable income. But in retirement when you make withdrawals, every penny will be taxed as ordinary income. If you are saving in Roth 401(k)s and Roth IRAs, you don’t get that upfront tax deduction on your contributions. Your contributions are made with after-tax dollars.  But in retirement you will not owe any tax on withdrawals.

Either way, 401(k) and IRA accounts are hit with tax at some point.

In tax terms, an HSA is a financial free lunch. Money you contribute to an HSA reduces your taxable income for that tax year.  Then when you eventually use the money in your HSA account to pay for a qualified medical expense you will not owe any tax. That makes saving in an HSA a better tax deal than saving in an 401(k) or IRA.

HSAs: Your Stealth Retirement Account

A key feature of all HSA accounts is that you are not required to use the money in the year you make a contribution. Unlike Flexible Spending Accounts (FSAs) there is no use-it-or-lose it rule. That makes it possible to treat your HSA like a retirement account.

If you have savings or cash flow to cover current health care out-of-pocket expenses you can leave the HSA money untouched, with the intention you will use it in retirement. In the meantime, you get the valuable upfront tax deduction on money you contribute to your HSA, and your balance grows without incurring any tax bills along the way.

If you decide to use your HSA account as a retirement account, make it a habit to save all bills and records of medical expenses you incur in the coming years. There is no time-limit on when you can use an HSA to reimburse yourself for medical expenses you incurred once your HSA was up and running.

For example, you could reimburse yourself 20 or 30 years later, all with tax free dollars. All you need is the documentation to prove that the withdrawal was tied to qualified medical expenses. That can give you a nice chunk of tax free money in retirement to use for whatever you want. A cruise, to help pay for the grandkid’s college. Whatever. All tax free.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.

About the author

Carla Fried

Carla translates business and personal finance concepts into engaging content that helps individuals make more confident choices in how they manage their money. Her work appears in The New York Times, Money Magazine, Barron's and Consumer Reports.

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