Using a Health Savings Account as a Retirement Savings Vehicle

Most of us are familiar with the common and widely used retirement savings accounts, namely the 401(k) plan, traditional IRA, Roth IRA, SEP IRA, and 403(b). However, one of the lesser-known retirement savings strategies utilizes an account that isn’t even a retirement-specific plan.

A health savings account (HSA) is a tax-advantaged account that is available to participants of HSA-eligible, high-deductible health plans (HDHPs). Contributions made to HSAs are tax-deductible, growth in the account is tax-free, and distributions are tax-free so long as they are used to pay for qualifying medical expenses. If you weren’t counting, that’s three different forms of tax savings.

In fact, the HSA is the only account type that receives these triple tax savings, which is a big part of what makes it such an attractive account. Plus, the definition of qualified medical expenses is quite broad (some might surprise you)—ask your health insurance provider for a list of qualified medical expenses.

That’s all great, but what does this have to do with retirement savings? Part of the beauty of an HSA is that funds remaining in the account after age 65 (the age of Medicare eligibility) can be used for any retirement expenses.

It is important to note that distributions from an HSA for general retirement expenses do not receive a tax exemption, like distributions used for qualified medical expenses. The distributions will be treated as taxable income, much like a distribution from a traditional IRA.

But unlike a traditional IRA, HSAs do not have required minimum distributions (RMDs) under current law. This means you can let the money in your HSA grow tax-deferred until you need it. There is no age at which you are forced to take distributions.

Because there are no RMDs to be withdrawn from an HSA, they are an attractive option for funding expenses for long-term care in retirement. If you aren’t required to distribute the account over time, then you know it can be there for you when you need it for long-term care.

These properties make the HSA a powerful savings tool, both for qualified medical expenses and for retirement. If you’re unsure whether a health savings account is an option for you, ask your employer if your health insurance plan is HSA-eligible. If you do qualify to open a health savings account, I encourage you to find a fee-only, fiduciary investment advisor to offer guidance on how to put your HSA funds to work for you.

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Zac Pohlenz, CFP®

As a Wealth Advisor, Zac works every day to help clients reach their financial goals, and finds it satisfying to know that he has helped someone gain a new perspective that can help change their life.