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When it comes to socking money away for retirement, savers have different choices. IRAs are a popular retirement savings option because they’re open to anyone with earned income, whereas with a 401(k), you need to have access to a plan through your employer or otherwise qualify for a solo 401(k) due to self-employment. But 401(k)s are also commonly used to grow retirement wealth, especially since many come with employer matching programs that make it easier to save.
But what if your finances are such that you’re able to max out your IRA or 401(k) plan for the year and still have money left over to earmark for retirement? You could, in that case, invest in a traditional brokerage account, but then you won’t get any tax breaks. In fact, taking gains in a regular brokerage account could actually increase your tax burden.
Thankfully, there’s another tax-advantaged savings tool out there that isn’t specific to retirement, but can double as a retirement plan nonetheless. And if you qualify for it, it’s a great place to put your money.
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Are you eligible for an HSA?
Not everyone is allowed to contribute to a health savings account, or HSA, just like 401(k) plan participation isn’t universal. To qualify for an HSA, you must be enrolled in a high-deductible health insurance plan, the definition of which changes every year. But if you meet the requirements, it pays to contribute to one of these plans for a few reasons.
First, healthcare expenses can arise at any time. And so by funding an HSA, you’ll have a dedicated source of cash for near-term and future medical bills.
Secondly, HSAs offer more tax benefits than any of the aforementioned retirement savings plans. That’s because HSA contributions go in tax-free and investment gains in these accounts are tax-free as well. Withdrawals are also tax-free when used for healthcare purposes.
Now, it’s possible to spend down an HSA during your working years and have little to no money left over for retirement. But if you do the opposite — pay for near-term medical bills out of pocket and leave your HSA alone — you could set yourself up with quite a lot of money for healthcare bills later in life. And given that seniors routinely lose a large chunk of their income to medical costs, that’s not a bad thing at all.
But here’s why it really pays to treat an HSA as a retirement savings plan. Once you turn 65, you can access the money you have in that account for any purpose — it doesn’t have to be healthcare-related — and avoid penalties. You will pay taxes on HSA withdrawals in retirement when funds are removed for non-medical purposes, but that’s no different than paying taxes on IRA or 401(k) distributions from a non-Roth account.
Don’t pass up this savings opportunity
The more money you’re able to save for your senior years, the better. If you’ve exhausted your IRA or 401(k), it definitely pays to look into maxing out an HSA. And remember, if you’re eligible based on the health insurance plan you participate in, it doesn’t matter if your employer doesn’t offer an HSA. You can open one independently and allocate funds for healthcare during retirement — or for retirement as a whole.
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