Is This the Most Overlooked Retirement Account?

Key Points

Many workers today have at least heard about the importance of saving for retirement. And if that’s something you’re inclined to do, you may be familiar with retirement accounts like IRAs and 401(k)s.

There’s nothing wrong with using these tools to build a retirement nest egg. In fact, it definitely pays to try to max out IRA or 401(k) contributions due to the tax benefits involved.

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But there’s a lesser-known account you may want to use to supplement your IRA or 401(k). And while it’s not strictly a retirement account, it can easily serve as one.

Are you taking advantage of a health savings account?

Health savings accounts, or HSAs, may not be as popular as IRAs or 401(k)s. In fairness, they’re also not as accessible.

Anyone with earned income can contribute money to an IRA. And many workplaces offer 401(k) plans.

With an HSA, you can only contribute if you’re enrolled in a health insurance plan that’s compatible with one. But if you are able to fund an HSA, it pays to do so and reserve those funds for retirement.

If you’re not familiar with HSAs, they let you save for healthcare in a tax-advantaged fashion. Contributions are tax-free, and money you don’t need right away can be invested tax-free. Withdrawals are also tax-free as long as you’re using the money to pay for qualifying healthcare expenses.

HSAs let you withdraw funds for medical expenses at any time. You could contribute to an HSA and take a withdrawal a couple of weeks later to cover a copay at a doctor’s office. Or, you can let your balance grow for 27 years. Both are equally valid options.

It’s this flexibility that allows an HSA to double as a retirement account. Since you’re not required to use up your balance by a certain point, and it gets to grow tax-free, you can carry it into retirement and use it at a time when your medical expenses are likely to be higher.

But that’s not all. Before age 65, there’s a 20% penalty for using an HSA for non-medical withdrawals. Once you turn 65, that penalty is waived. And from there on out, you can use your HSA for any reason without being penalized.

In that situation, you’ll pay taxes on withdrawals, whereas you won’t face taxes for medical withdrawals. But that basically puts an HSA on par with a traditional IRA or 401(k). So that’s still a very strong benefit.

Know how to make the most of your HSA

If you’re eligible to contribute to an HSA, recognize what a powerful retirement savings tool it can be. You may be inclined to use your HSA as medical bills arise. But if you’re able to pay for those separately and keep your HSA invested on a long-term basis, you could set yourself up with a lot more money — and flexibility — once retirement rolls round.

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