This Underused Retirement Account Leaves 401(k)s and IRAs in the Dust

A lot has changed over the last few decades, but the way people save for retirement is still the same. Most stick to a 401(k) or an IRA unless they’re self-employed.

While these can be solid options for your savings, there’s another underrated savings vehicle most people overlook. Not everyone qualifies for it, but if you do, you should definitely consider stashing some of your money here.

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It’s tough to beat the triple tax advantage of health savings accounts

Health savings accounts (HSAs) were originally intended to hold medical savings, but the unique tax perks they offer make them a great fit for retirement savings too. HSA contributions reduce your taxable income for the year, just like contributions to traditional IRAs or 401(k)s. Those who invest their HSA funds won’t owe any taxes on their earnings until they withdraw them, and money spent on medical expenses at any age is tax-free.

That last bonus is something you only see with HSAs, and it’s why these accounts are a great fit for your retirement medical savings. People typically see their medical costs rise as they age, so the option to avoid taxes on these withdrawals is a huge plus.

You can also make non-medical withdrawals from your HSA, but you’ll pay taxes on these. You’ll also face a 20% penalty if you’re under 65. But once you hit this age, the HSA becomes more or less like a traditional IRA with tax-free medical withdrawals.

But while traditional IRAs force you to begin making required minimum distributions (RMDs) at 72, HSAs don’t do this. You can leave your money in the HSA for as long as you’d like, so it can continue growing until you need it.

But not everyone can use an HSA

If you want to open an HSA, you need a high-deductible health insurance plan. That’s one with a deductible of $1,400 or more for an individual or $2,800 or more for a family in 2022. As long as you meet that requirement, you can open an HSA with any provider you want. Ideally, you should look for one that will enable you to invest your savings so they can grow more quickly.

Individuals may contribute up to $3,650 to an HSA in 2022, while families can contribute up to $7,300. Adults 55 and older can tack an extra $1,000 onto these limits.

An HSA probably shouldn’t be your only retirement account

Despite the rare tax benefits the HSA offers, the low contribution limits and heavy penalties for non-medical withdrawals under 65 mean it’s not the best stand-alone retirement plan. It’s a great place to keep the money you plan to use for medical expenses and maybe even some savings you plan to use after you turn 65. But a 401(k), IRA, or self-employed retirement account might be a better place to house the bulk of your savings.

Think about the retirement accounts available to you and weigh their pros and cons before deciding which is right for you. If you’re planning to add an HSA to the mix, try to avoid making early withdrawals if you can. Budget for your health insurance deductible in your emergency fund so you can save your HSA funds for retirement.

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