As I talk to folks about how they are saving for retirement or using their HSA it is not well known that outside of your 401K company match your Health Savings Account (HSA) is the best way to save for retirement and could even be considered in some cases to beat a Roth IRA as an investment account.
Yes, I said it. Beats a Roth IRA.
First, what is a Health Savings Account (HSA)? An HSA is like a personal savings account, but it can only be used to pay for qualified medical expenses. The qualified medical expenses are detailed in IRS Publication 502 but includes a wide range of things from doctor visits, dental visits, eye glasses, even over-the-counter items like Advil or Tylenol. To be eligible for an HSA you must be enrolled in a High-Deductible Health Plan (HDHP) medical plan.
Now that we know what an HSA is, let’s talk about the little-known fact of the triple-tax advantage.
First, HSA contributions are with pre-tax dollars. They are not subject to Federal income tax, they are also not subject to payroll taxes like Social Security and Medicare. This one is huge and a little-known advantage of using an HSA.
Second, if you invest contributions, the investments grow tax-free over time.
Third, tax free withdrawals. If you withdraw the money for qualified medical expenses you pay no tax. Period. Healthcare expenses in retirement will be one of your biggest costs, so something to consider.
Important Note: You could withdraw 100% tax free for medical expenses in any year if the medical expense occurred after you opened the HSA account. So, start saving all your medical receipts now, this could be a big benefit in your golden years.
Additionally, (maybe the forth tax benefit), at age 65 you can withdraw the money for any reason (can be non-medical), you will just pay the taxes on it, whatever your tax bracket is at the time of withdrawal.
This of course assumes you can make it work within your budget and the funds are not needed for recurring medical expenses. But if you can, it is time to load up your HSA and start investing it in a low-cost index fund or ETF! Families can contribute up to $7,100 dollars per year. This includes employer contributions.
Confusing? Need help figuring this all out? Book a complimentary consultation with me today and we can walk through this together.
Look forward to talking to you soon!
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