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Consider Using HSAs as an Investment Retirement Vehicle

December 26, 2019

When it comes to retirement planning the consideration of health care expenses is critical and Health Savings Accounts (HSAs) are an option that most people don’t consider for this purpose.

HSAs are designed for people who use high-deductible health insurance plans that increasingly are included in benefits packages offered by employers. They also may be opened through the government health insurance marketplaces or exchanges. The following newsletter includes more information about HSAs and how you might benefit from them.

Rare triple tax-free play

A key point here is to start using and funding HSAs now, while contributing close to the annual limits if you can. But don’t tap the accounts too early. Workers who elect to pay current medical expenses from regular income can allow money in their HSAs to accumulate. As noted, the money will build up and withdrawals will come out tax-free if used for eligible medical costs, the definition of which is fairly broad.

Since you make contributions to an HSA using pre-tax dollars, you also reduce your current federal tax bill. Those contributions are deductible from state income as well.

Like a 401(k) plan, the money in an HSA grows tax-free. The savings can add up. Morningstar estimates that if you save in an HSA for 30 years you could end up with nearly $100,000 more than if you had saved in a traditional 401(k) where all withdrawals are taxed as income. You could save about $120,000 more than if the money had been invested in a regular taxable account, where withdrawn earnings would be taxes at 15%, the long-term capital gains rate for most people.

With an HSA, you can make withdrawals at any time and you won’t pay taxes on that money as long as you use it to cover medical costs. This can help you avoid withdrawing funds—and paying taxes—from a traditional 401(k) or IRA to cover health expenses.

Because money pulled from HSAs during retirement avoids taxes, unlike that from traditional IRAs, it wouldn’t cause problems if you already have started to claim Social Security retirement benefits.

Social Security benefits could be partly taxable if you have a significant amount of other income. Job earnings, pension withdrawals and traditional IRA distributions are among the income sources that could trigger taxes but not those from Roth IRAs or HSAs.

For more information about how you could benefit from using HSAs as a retirement savings vehicle please view our white paper: "Health Savings Accounts (HSAs) as a Retirement Investment Vehicle".