There's a reason so many people contribute money to retirement plans like IRAs and 401(k)s, even though these plans come with their share of restrictions, like being penalized for taking early withdrawals. With a traditional IRA or 401(k), you get a tax break on your contributions. With a Roth IRA or 401(k), you get tax-free investment gains in your account, as well as tax-free withdrawals.
These are all nice benefits to enjoy. But when it comes to IRAs and 401(k) plans, you have to pick and choose which ones you get. You can either have tax-free contributions or tax-free gains and withdrawals. You can't get all three with a single account.
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Health savings accounts (HSAs) work differently, though. With an HSA, all three tax breaks are available to you under the same roof. But if you want to really benefit from this exceptional savings account, you'll need to pledge to leave your HSA alone through the years and let it grow.
Why you shouldn't tap your HSA during your working years
The great thing about HSAs is that your funds never expire (unlike money in FSAs, which generally require you to spend down your entire balance each year or risk losing it). So you can spend your entire career contributing to your HSA, and then carry that money with you into retirement.
Of course, you're totally allowed to tap your HSA at a younger age if you need the money for near-term healthcare bills. But if you can avoid taking HSA withdrawals ahead of retirement and pay for healthcare expenses out of pocket, it's best to do so.
First, as mentioned earlier, HSAs allow you to enjoy tax-free investment gains on the money you have in your account. So the less money you take out of your HSA, the more you can invest and let it grow.
Second, while your healthcare expenses may seem high now, they may be negligible compared to what you might spend as a retiree. Between Medicare premiums, deductibles, copays, and generally worsening health (an often-avoidable symptom of aging), you may find that your senior medical costs are quite burdensome. And so the more money you have available in your HSA, the less financial stress you might encounter later in life.
Make the most of your HSA
HSAs are a truly unique kind of savings plan due to the three distinct tax breaks they offer. Your best bet is to do as much as you can to leave your HSA alone while you're working. If you're able to reserve all of that money for retirement, you'll be in a much better position to manage your healthcare costs as they arise.
And don't worry -- if you wind up with more money than you need for healthcare in your HSA, once you turn 65, you're allowed to withdraw from that account for non-medical purposes without facing a penalty. So all told, you get a tremendous amount of flexibility by saving in an HSA.
