This Account Is a Great Retirement Savings Tool — but Are You Using It That Way?

You'll often hear that it's important to save independently for retirement during your career. And that's definitely good advice.

Once you retire, you don't want to end up too reliant on Social Security, because those benefits will most likely only replace a small percentage of the income you're used to living on. As such, you'll want to bring plenty of savings with you into retirement.

Now many people are familiar with the fact that IRAs and 401(k) plans are popular retirement savings tools. But there's another account you can utilize as a means of saving for retirement — even if that's not its sole or even primary purpose.

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Make the most of an HSA

If you're enrolled in a high-deductible health insurance plan, you may be eligible to contribute to a health savings account, or HSA. With an HSA, you can take withdrawals to cover near-term medical expenses, like co-pays for doctor visits and prescriptions. Meanwhile, the money you put into an HSA is tax-free, so in funding one, you exempt some of your earnings from taxes. It's the same benefit you get when you contribute to a traditional IRA or 401(k).

But that's not the only benefit you'll enjoy with an HSA. These accounts do not require you to spend down your plan balance year after year (only flexible spending accounts, or FSAs, have that rule). So once you put money into an HSA, you can carry it forward as long as you want.

And it definitely pays to carry funds forward. Unused HSA funds can be invested so they grow into a larger sum over time. And any gains you enjoy in your HSA will be tax-free, as will withdrawals, provided they're used to pay for qualified medical expenses.

So let's get back to retirement. Once your senior years arrive, there's a good chance your medical bills will increase, partly because health issues tend to arise with age, and partly because Medicare commonly leaves seniors with plenty of out-of-pocket costs. And having money set aside in an HSA is a great way to cover those costs at a time in your life when your income may be more limited.

But that's not the only perk of carrying HSA funds into retirement. Once you turn 65, penalties for nonmedical withdrawals are waived. So come age 65, your HSA will effectively have the same function as a traditional IRA or 401(k) — meaning you'll pay taxes on the money you remove, but you won't be penalized for removing it. And remember, medical withdrawals will still be tax-free.

Don't blow a big opportunity

Many people who have HSAs use them to pay for medical bills as they go. But a better bet is to cover your near-term healthcare costs out of pocket and invest your HSA funds over time. That way, you'll have even more assets at your disposal once retirement arrives. And that could spell the difference between enjoying your senior years versus having to worry about money all the time.

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