A Health Savings Account, commonly referred to by the acronym “HSA”, was created to incentivize employees to incentivize people to take some responsibility of their medical expenses. It operates like a normal savings or investment account in which your employer will fund and you can use that money only to pay qualified medical expenses. It’s important to note that you are only eligible for an HSA account if you select a high deductible insurance plan which means your monthly premium is lower, but your out-of-pocket exposure is much higher. It’s important you do your own homework to decide whether a HSA is right for you. This article is not about deciding between health insurance plans so do your research. This article is specifically about the retirement benefits of HSAs.
The reason I love HSAs is because of a loophole that allows us to increase our tax efficient retirement investing. In an HSA you are able to invest your contributions and all money put into an HSA is before taxes, similar to a 401k. At any point you can take money out of my account to cover medical expenses (tax free). At 65 years old you can take money out for any reason and simply pay income taxes, just like a 401k. The two most important things to keep in mind are that (1) there are steep penalties if you withdrawal the money before you reach 65 for anything other than qualified medical expenses and (2) you need to be aware by using a high deductible health care plan you have higher exposure to health care costs than you would with a “tradition” retirement plan. I personally try to pay my normal medical expenses out of my non-HSA earnings so I can let me HSA accounts continue to build.
This approach works for me and my family, but again I’ll reinforce the importance of doing the math for your own personal situation.
