The Ultimate Retirement Account? Making The Most Of Your HSA

Saving money is often mentioned as one of the core steps toward financial success. Also important is deciding where to save money, as there are numerous options to consider. 401(k)s, IRAs, Roth IRAs, nonqualified accounts, and others have their own rules, benefits, and tax implications. Among all of these, though, there is one account that may be the most valuable and, at the same time, the most overlooked: the health savings account (HSA).

An HSA is a tax-advantaged way to save money to pay for qualified medical expenses. It is available for people who are covered by a high-deductible health insurance plan and, similar to 401(k)s and IRAs, HSAs do have contribution limits set each year. While many high-income earners may find themselves ineligible for a Roth contribution or IRA deduction, HSAs have no income limits on who can contribute.

Since it is only available to those with high-deductible health plans, you must make sure that type of health insurance best fits your situation.

When people think of the HSA, seldom do they think of retirement savings. Often it is used instead as a source of funds for current healthcare costs to be withdrawn and spent each year. This can lead to a significant missed opportunity. Unlike a flexible spending account (FSA), where funds have to be spent by the end of the year, HSAs allow account balances to roll over into future years. Because of this, along with the tax benefits and flexibility that an HSA offers, it becomes an ideal long-term investment account. Being more specific, the HSA becomes a perfect account to view as a medical retirement plan.

HSA tax benefits

A major feature of the HSA that sets it apart from other accounts is its tax benefits. Various accounts, especially retirement accounts, offer some form of the following: a tax-deduction on contributions, tax-deferral on growth, and/or tax-free withdrawals.

Outdoing all of these, the HSA offers triple-tax benefits:

  • Tax deductions on contributions
  • Tax-deferred growth
  • Tax-free withdrawals if used for qualified medical costs

Adding all these together can result in sizable tax savings and more money in your pocket. You could try to maximize these tax savings by investing the contributions for growth and not withdrawing them right away for current medical costs. When they are withdrawn immediately, the account loses one of its three tax benefits, as it is being denied the opportunity for tax-deferred growth.

HSA is flexible

Along with great tax benefits, HSAs, in many instances, offer the best flexibility. One reason is that HSAs do not have limitations on when a healthcare expense is incurred and when it is reimbursed. Adding to the flexibility, the list of medical expenses that the IRS views as qualified is long. It includes items such as doctor visits, dental exams, lab fees, and physical therapy.

The medical retirement account

To get the most use from the benefits of an HSA, it is best viewed as a long-term investment vehicle to help with future medical costs in retirement. It can be a missed opportunity not to approach it as such. This includes investing and trying to maximize contributions for growth, paying current medical costs out of pocket, and saving the receipts so that you have the option to withdraw funds if life events lead to some temporary hard times.

Summing it up, with all the benefits that come with a HSA, it can be a great option for medical expenses in retirement — considering that you must be on a high-deductible health insurance plan to be eligible for an HSA and that such a plan may not always best fit your health situation.