Are HSAs the New IRAs?
One of your goals for this year should be to max out as many different retirement vehicles as possible. Everyone always focuses their attention on 401ks and IRAs, but what about Health Savings Account or HSA? The HSA is a top strategies for saving for retirement, and it should be a high priority for you too.
Health Savings Accounts (HSAs) allow you to set aside funds to pay out-of-pocket medical expenses. HSA-qualified expenses include co-insurance, deductibles, dental and vision care, prescriptions, and many other health-related items. However, it can also work as a "secret" IRA and allows you to save even more for retirement tax-free. It's important to remember that HSAs aren't technically retirement accounts like an IRA, but the rules associated with the account make it a great tool for savers who qualify for it.
HSAs can help those in eligible high-deductible health plans1 (HDHPs) sock away triple-tax-free money for qualified medical expenses in retirement as long as you don’t make these 3 mistakes.
Here’s how:
Contributions to HSAs are tax-deductible
Capital gains, dividends and interest accumulate tax-free.
You pay no tax on withdrawals for qualified medical expenses.
Other notable advantages of an HSA are that it’s yours to keep indefinitely (though you can no longer contribute once you’ve enrolled in Medicare or if you’re not covered by an HDHP), and any unspent money remains in your HSA until you use it.
So, now that your money is in this account, what now? Here's where the real fun begins. You can withdraw the money at any time for medical expenses. The money in your HSA carries over from year to year, and if you leave your employer, you can take your money with you. Remember, it's your HSA, just like an IRA or 401k would be your money too. The huge advantage of the HSA is that you can invest the money inside the account in general you can select funds similar to a 401k inside your HSA. Some HSAs require you always maintain a cash minimum (like $2,000) before you can invest, but once you reach that limit, you can invest in the funds offered.
There are some drawbacks: If you use HSA funds on non-medical expenses before age 65, you pay both ordinary income tax and a 20% penalty. However, if you use HSA funds for non-medical expenses after age 65, you pay only ordinary income tax. In other words, you’d take no worse a tax hit than you would with an Individual Retirement Account (IRA).
The bottom line
Basically, if you can afford to pay for your medical bills today, you should be maximizing your contribution to your HSA between your money and your employer. Some employers who offer HSAs typically contribute anywhere from $600 to $1,250 to your account. That's a free match, just like your 401k.