You have two options for how to use your health savings account (HSA). You can make withdrawals from your HSA to pay today’s medical costs with tax-free dollars. Since this was the intended purpose of an HSA, this is how most HSA owners use their funds. In 2019, Lively HSA accountholders spent 96 cents of every dollar in their HSA to cover current medical costs.

But there’s another option you might want to consider: treating your HSA as a savings tool.

Rather than tapping money to pay current tax medical expenses, you can choose to save the money with the intention of using it sometime in the future. That could be next year, a few years from now, or during retirement.

An HSA can be a valuable stealth retirement plan. In fact, an HSA has more tax benefits than traditional or Roth 401(k)s, or Individual Retirement Accounts (IRA).

When to use an HSA to pay for current out-of-pocket medical costs.

It is never ideal to go into debt to cover your deductible and other out-of-pocket costs. If you have medical bills right now that you can’t cover from your checking account (or by tapping a portion of your emergency savings), it is wise to use your HSA today to pay your outstanding medical bills. Withdrawals for qualified medical expenses will be tax-free if you use your HSA to pay those bills.

That’s going to be a lot smarter than paying with a credit card that you won’t be able to pay in full when the next statement arrives. It makes no sense to run up a credit card balance and pay the stiff interest rate; in early 2020 the average credit card balance had a 17% average interest rate.

When to consider saving your HSA.

If you can pay deductibles and other health care costs that crop up during the year from your regular checking account or savings, you might want to consider the benefits of treating your HSA like a long-term investment account.

Treating your HSA as a retirement account can be a big tax win:

More tax breaks than your standard retirement accounts.

With traditional and Roth retirement accounts you have to pay taxes at some point. With a traditional 401(k) or IRA, your contribution qualifies for a tax deduction, but there’s a tax when you make withdrawals. Every dollar is taxed as income. With a Roth 401(k) or IRA your tax bill is upfront: your contribution is made with after-tax dollars and withdrawals are tax-free, assuming you follow a few easy rules.

An HSA can be completely tax-free. Your contributions are eligible for a tax deduction, and if you use withdrawals to pay qualified medical expenses (there is a long list of medical expenses that are eligible) there will be no tax bill.

Help with health care costs not covered by Medicare.

Medicare covers a lot of health care costs, but not all. According to the Employee Benefits Research Institute, a 65-year old man in 2019 with typical medical costs, who wants a high probability he will be able to cover his out-of-pocket retirement medical costs throughout his retirement will need about $144,000. For a woman, the estimated out-of-pocket is $163,000. This doesn’t include any long-term care expenses. Tax-free HSA dollars effectively boosts the value of your savings that you will have to cover health care costs in retirement.

Help manage your tax bills in retirement.

If you’ve been doing a lot of your retirement savings in traditional 401(k)s and IRAs, you need to plan for the reality that whenever you make withdrawals in retirement, every dollar you take out will count as taxable income. (Long-term capital gains tax rates do not apply to retirement accounts.)

This is where an HSA shines bright. Withdrawals for qualified medical expenses will be 100% tax-free.

For example, let’s say one year in retirement you run into an illness that generates $15,000 in expenses not covered by Medicare. If you intend to pay those bills from a traditional retirement account, you will owe tax on the withdrawal. That not only will require withdrawing more than $15,000 to cover the tax and pay your medical bills, but it could bump you into a higher tax bracket.

Keep in mind that even if you intend to treat your HSA as a long-term savings/investing account, you always have the freedom to tap into it at any time, even if you’re no longer eligible to contribute to your HSA.