3 Reasons You Should Prioritize Saving for Retirement in an HSA
If you have access to a health savings account, or HSA, it should be a top priority for your savings. The account, available to members of certain high-deductible health insurance plans, offers a slew of tax benefits while remaining extremely flexible. Here are three reasons you should be putting your savings in an HSA.
1. Better tax benefits
Traditional retirement accounts allow you to defer your taxes until you take distributions. A Roth account lets you take distributions tax-free, but you’ll have to pay taxes on your contributions. An HSA offers the best of both worlds. You don’t pay any income tax on your contributions, and qualified distributions are tax-free as well. (Note, qualified distributions are only for medical expenses.)
Plus, if you’re able to fund your HSA through your employer’s payroll, you’ll be able to save on the FICA tax. That’s an additional 7.65% in tax savings on your contribution. The only downside is that those contributions don’t count toward your Social Security earnings record.
Investments in your HSA are treated just like in retirement accounts. You won’t pay any taxes on capital gains, dividends, or interest. All told, an HSA is one of the easiest accounts to keep completely tax-free.
2. No age restrictions on distributions
An HSA is designed to help pay for medical expenses. You can take a distribution at any time as long as you have a qualified medical expense to pay for. So, if you have a medical procedure coming up, you can pay for it with your HSA funds.
Better yet, if you can afford to pay for it with funds outside of your investment portfolio, you can hold onto the receipt and take a distribution later. It could be next year or 40 years from now. The ability to accrue medical expenses for 40 years and then wait to withdraw from your HSA to cover those expenses allows your investments to grow completely tax-free for a long time.
What’s more, if you retire early, you’ll be able to start taking distributions right away. While there are ways to access your 401(k) or Roth IRA early, they require some planning. An HSA is simply there when you need it.
3. The worst-case scenario is just as good as an IRA
If you diligently save money in your HSA and allow your investments to grow, you could end up with a sizable account. If you have the need to withdraw more money from your HSA than you have in accumulated medical receipts, you can still do so.
If you wait until age 65, you can take money out of an HSA for any reason without penalties. You’ll simply owe income tax for distributions that aren’t covered by qualified medical expenses. In that sense, it works nearly the same as a traditional IRA, which requires you to wait until age 59 1/2 to take penalty-free distributions.
Ideally, you’ll only use the HSA to cover medical expenses so you never have to pay taxes on your money. It’s very likely you’ll have some big medical expenses in retirement. But if you need to access the funds, the worst-case scenario is still just as good as an IRA.
Considering all the advantages of an HSA, smart investors should look to fund their accounts to the maximum if they can.
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