The Best Retirement Account You’re Probably Overlooking

Health savings accounts (HSAs) are a powerful quadruple tax-advantaged Retirement savings tool that can help you save for qualified medical expenses, both now and in retirement.

1. Contributions are tax-free. You can contribute up to $4,150 for individuals and $8,300 for families in 2024 to your HSA. These contributions are deducted from your income before taxes, which lowers your taxable income and your tax bill. If you are 55 or older, you can also make an additional catch-up contribution of $1,000 per year.

2. Contributions are also pre-FICA. Unlike other tax-free contributions, such as 401(k) or IRA contributions, HSA contributions are also exempt from Social Security and Medicare taxes (FICA taxes), which are 7.65% of your income up to a certain limit. This means you can save even more money by contributing to your HSA.

3. Growth is tax-free. You can invest your HSA funds in various options, such as mutual funds, stocks, bonds, and ETFs. Any earnings or interest from these investments are not subject to taxes, which allows your money to grow faster and compound over time.

4. Withdrawals are tax-free (if taken for qualified medical expenses). You can withdraw money from your HSA at any time, as long as you use it for qualified medical expenses. These withdrawals are not subject to income taxes or penalties, which means you can use tax-free money to pay for your health care costs.

To open and contribute to an HSA, you need to be enrolled in a high-deductible health plan (HDHP), which is a type of health insurance plan that has a relatively low monthly premium but a higher deductible and out-of-pocket maximum.

One of the best features of an HSA is that it has no expiration date or required minimum distributions (RMDs). This means you can keep your money in your HSA as long as you want, and you don’t have to withdraw a certain amount every year after age 72, unlike 401(k)s or traditional IRAs.

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Here are some strategies on how to use your HSA for retirement:

• Save your receipts and reimburse yourself later: Don’t use the HSA funds for current medical expenses (if you can afford). You can withdraw money from your HSA years or even decades later, using your receipts as proof of qualified medical expenses. This way, you can let your money grow tax-free in your HSA longer and use it as a source of tax-free income in retirement.

• Use your HSA for Medicare premiums and long-term care expenses. After age 65, you can use your HSA funds to pay for Medicare Part B and Part D premiums, as well as Medicare Advantage plans. These premiums are considered qualified medical expenses and are not subject to taxes or penalties. You can also use your HSA funds to pay for long-term care insurance premiums or long-term care services, which can be very expensive in retirement.

• Use your HSA for non-medical expenses after age 65 (with taxes). If you have enough money in your HSA and you don’t need it for medical expenses, you can withdraw it for any reason after age 65 without penalty. However, you will have to pay income taxes on these withdrawals, just like a traditional IRA. This option may not be the most tax-efficient way to use your HSA, but it gives you more flexibility and access to your money if you need it.