Your Secret Retirement Savings Account

While most people will recognize an HSA account for its intended use - namely, covering out-of-pocket medical expenses - far fewer recognize the true potential of the humble HSA. While most retirement accounts reduce your taxes on the way in (401ks & IRAs) or on the way out (Roth accounts), the HSA is the rarest of unicorns in the financial world – a “triple tax advantage” account.

1. Pre-Tax Contributions: Much like traditional 401k plans, your contributions to an HSA are made with pre-tax dollars. This means the money you set aside in an HSA is deducted from your paycheck before taxes, reducing your overall taxable income.

2. Tax-Free Growth: The second layer of the tax advantage comes with the growth of your investments. Whether your HSA funds are accumulating interest in a savings account or invested in the market, the growth is tax-free.

3. Tax-Free Withdrawals: Lastly, withdrawals from your HSA for qualified medical expenses are not subject to tax. This is where HSAs diverge from traditional retirement accounts, and the magic really happens.

A Retirement Saving Tool in Disguise

If you are fortunate enough to not need to tap into your HSA for medical expenses immediately, you can invest the funds in your HSA and allow the money in your account to grow over the years, untouched and untaxed. Moreover, the funds in your HSA roll over from year to year. There’s no “use it or lose it” rule as with some other healthcare-related accounts. This allows you to build a sizable nest egg for future healthcare costs.

Once you hit 65, the HSA morphs yet again. Although you’ll still be able to make tax-free withdrawals for qualified medical expenses, you can also make withdrawals for any other purpose. The catch? You’ll need to pay regular income tax on these non-medical withdrawals. However, this still puts the HSA on par with traditional 401k or IRA accounts.

In short, the unassuming HSA has the potential to be one of the most powerful tools at your disposal in saving for retirement. With its unique triple tax advantages, it stands apart from the usual suspects like 401ks and IRAs. By seeing it as more than just a healthcare expense account, you may be able to give your portfolio an extra boost in achieving your retirement goals.

Investing involves risk. No investment strategy can guarantee positive results. Loss, including loss of principal, may occur. Material discussed is meant to provide general information and it is not to be construed as specific investment, tax or legal advice. Keep in mind that current and historical facts may not be indicative of future results. Diversification is an investment strategy that can help manage risk within a portfolio, but it does not guarantee profits or protect against loss in declining markets.

This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. (C) Twenty Over Ten