Should You Make an HSA Your Main Retirement Savings Account?

Even though health savings accounts, or HSAs, are meant to help people set money aside for healthcare expenses, you’ll often hear that they can double as a retirement savings plan. And that’s not incorrect.

The great thing about HSAs is that your funds never expire. If you put money into an HSA in your 20s or 30s, you can carry that balance all the way into retirement and take withdrawals for medical spending then. Plus, HSAs let you invest money you don’t need to use right away so you can grow your balance over time.

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And, HSAs are the only savings plan to be triple tax-advantaged. Contributions to HSAs are tax-free, investment gains in an HSA are tax-free, and withdrawals are tax-free, provided they’re used for qualified medical expenses.

Meanwhile, once you turn 65, you can take an HSA withdrawal for any purpose without being penalized. And because of that, you may be inclined to start treating your HSA as your primary retirement savings account. But is that a good idea?

Why it pays to have more than just an HSA

It’s true that HSAs are extremely flexible and that they can function just like a traditional retirement savings plan once you turn 65. The problem, though, is that if you take HSA withdrawals at that point to pay for nonmedical expenses, you’ll be taxed on the money you remove.

Now on the one hand, that’s really no different than the taxes you’ll pay on traditional IRA or 401(k) withdrawals. But given that money may be tighter than you’d like it to be in retirement, it could pay to set yourself up with some tax-free income. And that’s a good reason not to make an HSA your main retirement plan — because it won’t give you that option aside from medical expenses.

In fact, one strategy you may want to adopt during your working years is to max out an HSA on an annual basis, and also a Roth IRA. Roth IRAs offer the perk of tax-free withdrawals during retirement. Further, Roth IRAs don’t force you to take required minimum distributions. That allows you to keep your money invested as long as you’d like.

It could also pay to fund a 401(k) for retirement savings purposes if your employer offers a match. Plus, 401(k)s come with higher contribution limits than HSAs and IRAs. So if you have a larger chunk of money you’re able to set aside for retirement, you might as well stick it into a tax-advantaged savings plan.

One piece of the puzzle

An HSA is definitely a great retirement savings tool — but it probably shouldn’t be your only one. Instead, think about how you can use an HSA in conjunction with other tax-advantaged plans to build yourself a solid nest egg and set yourself up for a secure future. You may find that a combination of an HSA and Roth IRA, or those two plans plus a 401(k), puts you in the best position to tackle your future expenses with relative ease.

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