Have an HSA? Here’s Why You Shouldn’t Tap It Just Yet.

Saving in an HSA, or health savings account, is a great way to help ensure that you'll have money on hand when healthcare expenses arise. But actually, if you want to make the most of your HSA, then your best bet is to not touch that money year after year. Here's why.

HSAs and FSAs are different

Many people are familiar with flexible spending accounts, which have you allocate money for near-term medical expenses. With an FSA, you need to spend down your balance by the time your plan year (or related grace period) ends. If you don't, you risk forfeiting your money.

But HSAs work differently. With an HSA, there's no time limit for using your money. You could contribute $3,000 to your account in 2022 and withdraw that money in 2042 if you don't need it right away. In fact, the best way to maximize your HSA is to not take withdrawals from it until you reach retirement.

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Unlike FSAs, HSAs let you invest the money you aren't using right away. And any gains that result from your investments are yours to enjoy tax-free.

Now, let's say you contribute $3,000 a year to an HSA over 30 years, but you never take withdrawals. Instead, you pay for medical costs out of pocket and let your HSA balance grow. Let's also assume that your investments in your HSA deliver an average annual 7% return. That's several points below the stock market's average and is a reasonable assumption for a 30-year savings window.

If you stick to that plan, you'll end up with an HSA balance of over $283,000. And that's a nice sum to bring with you into retirement, when you might spend a lot more money on healthcare than you did during your working years.

Another great thing about HSAs? Normally, you'll face costly penalties for withdrawing funds for non-medical purposes. But once you turn 65, that restriction lifts, and you can take a penalty-free withdrawal for any purpose at all.

Now in that case, you will pay taxes on your withdrawal, whereas medical withdrawals are tax-free. But still, that gives you a world of flexibility, because if your senior healthcare costs end up being lower than anticipated, your HSA can effectively convert to a regular retirement savings plan, like an IRA or 401(k) plan. And while you may not love the idea of paying taxes on your withdrawals, those taxes apply to money removed from a traditional IRA or 401(k), so they're something you may be prepared for.

Make the most of your savings

While HSAs aren't necessarily a retirement savings plan, your best bet is really to treat yours as one. That means leaving your money alone year after year so it grows into a larger sum.

You may need to allocate funds for healthcare expenses in your budget to compensate for not tapping your HSA year after year. But that's a move worth making if it results in you entering retirement with a whopping pile of money.

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