There’s a reason retirement savers are commonly advised to sock money away in an IRA or 401(k) plan. These accounts offer different tax breaks designed to make it easier to build up a nest egg.
But there’s a lesser-known account you can use to stash money away for retirement. And it offers more tax breaks than traditional or Roth IRAs and 401(k)s.
You can use an HSA as a retirement savings account
If you’re enrolled in a high-deductible health insurance plan that meets the right requirements, you might be eligible to save in a health savings account (HSA). And it pays to do so, because you’ll not only get a chance to grow retirement savings, but also reap a world of tax breaks in the process.
Now, you may be thinking: “Wait a minute — how is an HSA a retirement account? Doesn’t it have to be used for medical spending?”
That line of thinking is understandable. Until you reach the age of 65, you will be penalized for taking an HSA withdrawal for anything besides medical expenses.
But once you turn 65, your HSA will actually convert to a traditional retirement plan, allowing you to remove funds for any expense without penalty. As such, it’s reasonable to refer to an HSA as a retirement savings plan — even though many people only associate it with healthcare.
Now, let’s talk tax breaks. With an HSA, you get three of them if you use your money for healthcare (which, incidentally, is likely to be one of your biggest retirement expenses anyway):
- HSA contributions are tax-free.
- Investment gains in an HSA are tax-free.
- HSA withdrawals are tax-free when used for medical purposes.
When we compare these perks to those offered by IRAs and 401(k)s, it’s easy to see that retirement plans don’t quite keep up. With a traditional IRA or 401(k) plan, you do get tax-free contributions. But investment gains are taxed eventually, as are withdrawals.
Roth IRAs and 401(k)s, meanwhile, allow for tax-free gains and withdrawals. But there’s no tax break on your contributions.
That’s why it really pays to max out your HSA contributions if you’re eligible for one of these accounts, and then make a point to keep your money invested rather than take withdrawals every time a medical bill arises (assuming you can afford to pay those bills out of pocket). The amount of money you can contribute to an HSA varies by year. In 2023, the limits are:
- $3,850 for self-only coverage if you’re under 55.
- $7,750 for family coverage if you’re under 55.
- $4,850 for self-only coverage if you’re 55 or over.
- $8,750 for family coverage if you’re 55 or over.
Even if you can’t max out your HSA, if you’re someone who enjoys the idea of saving money on taxes while growing wealth, then funding one of these accounts is a good bet.
And if you end up in the fortunate situation of not needing all of your HSA funds for healthcare expenses later in life, you can treat your HSA like a traditional retirement plan. To be clear, in that situation, you’re giving up your tax-free withdrawals (those only apply to distributions used for medical spending). But you’re still reaping a world of tax benefits either way.