Think an HSA Is Just for Medical Bills? Here's How It Can Double as a Stealth Retirement Account

When people think of health savings accounts, or HSAs, they don’t always associate them with retirement. And that’s understandable.

Technically, an HSA isn’t a retirement account. Rather, it’s an account that allows you to save for medical expenses in a tax-advantaged fashion.

Image source: Getty Images.

With an HSA, contributions are tax-free; unused funds you invest get to grow tax-free; and withdrawals used for qualifying healthcare expenses are tax-free. It’s hard to beat that trio of perks.

But while an HSA isn’t officially a retirement account, it pays to treat yours like one. Here’s why.

You have plenty of options for using your money

A lot of people are familiar with using flexible spending accounts, or FSAs, to cover medical costs. But FSAs are quite different from HSAs. They don’t allow you to invest unused funds, and your money has to be used by a certain time or you risk forfeiting it.

With an HSA, you can invest money you aren’t using, and you can carry your balance forward as long as you want to. In fact, HSA savers are encouraged to carry their balances forward. The longer you do, the more tax-free growth you might benefit from.

Because HSAs don’t have an expiration date on using your funds, it pays to reserve that money for your retirement years for a couple of reasons.

First, waiting longer to tap your HSA lets you money grow tax-free for longer. But also, your medical expenses are likely to increase in retirement compared to when you’re younger. So it makes sense to have dedicated healthcare funds at that time.

However, if you don’t end up using your HSA to cover healthcare needs in retirement, that’s OK. Normally, HSAs impose a 20% penalty on funds used for non-qualifying healthcare expenses. But once you turn 65, that penalty goes away.

If you take a non-medical withdrawal starting at age 65, you’ll be taxed on that money. But you won’t be penalized. And that tax is no different than the tax you’ll pay to withdraw from a traditional IRA or 401(k) plan.

Take advantage of an HSA if you can

If you’re on a health insurance plan that’s compatible with an HSA, it pays to fund that account year after year to the best of your ability. But more than that, aim to leave that money alone until retirement.

It can be tempting to tap your HSA to cover medical bills as they arise. And there’s nothing wrong with doing that if it’s your only option. But if you treat your HSA like a retirement account, you might really appreciate it later in life.