An HSA technically isn't a retirement savings plan. Rather, it's an account that's designed to help you enjoy tax benefits in the course of saving and paying for healthcare.
IRAs and 401(k)s, on the other hand, are accounts specifically designated for retirement. If you fund one of these plans, you're not even allowed to take withdrawals prior to age 59 1/2, and if you do, you'll face penalties.
But while you can absolutely access the money in your HSA ahead of retirement, it pays to reserve those funds for your senior years. If you do, you might enjoy these benefits.
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1. Tax-free investment gains
The money in your HSA that you're not using doesn't have to sit there doing nothing. You can invest your HSA funds, just like you can invest an IRA or 401(k) so your money grows.
What's great about HSAs, though, is that they allow for tax-free investment gains. In this regard, they're similar to Roth IRAs and 401(k)s, which are popular savings plans due to this feature.
Imagine you contribute $40,000 to your HSA in your lifetime, but your investments make it so your balance reaches $75,000. That's $35,000 in gains you can avoid taxes on, which is a pretty good deal.
2. Tax-free withdrawals for healthcare expenses
Many seniors find that healthcare is one of their largest retirement expenses. It might even end up being your single largest one, surpassing the amount of money you end up spending on housing.
The nice thing about having money in an HSA is that your healthcare-related withdrawals will be yours to enjoy tax-free. Given that some of your other retirement income sources, including traditional IRA or 401(k) withdrawals and, in some cases, Social Security, are taxable, it's nice to get that break.
3. Flexibility with your money once you turn 65
Just as there's a penalty for withdrawing funds from an IRA or 401(k) early, so too does a penalty apply for tapping an HSA for a nonmedical withdrawal. But that only holds true prior to age 65.
Once you turn 65, you can take an HSA withdrawal for any reason you want without penalty. The only thing that'll happen in that case is you'll owe taxes on the sum you remove, the same way traditional IRA and 401(k) withdrawals are taxed in retirement.
But still, it's nice to have that flexibility. Although some people wind up needing their entire HSA balances to pay for healthcare in retirement, if you don't encounter many medical issues later in life and make smart Medicare plan choices, you might end up with excess HSA funds. But rest assured that they won't have to go to waste. You'll have the option to use that money to do everything from cover utility bills to pay for entertainment.
Even though an HSA isn't a retirement account in the classic sense, it's in your best interest to treat it as one. That's because you might really enjoy all of these benefits once your career comes to a close.
