A health savings account (HSA) can be funded during your working years and tapped at any time. Need to cover a brief hospital stay during your 40s? That's what your HSA is there for. You can even take HSA withdrawals to cover things like doctor visits when you're feeling sick or ongoing prescriptions.
But if you really want to make the most of your HSA, it pays to do what you can to save at least some of the money in yours for your senior years. Here are some of the benefits you might appreciate having as a retiree.
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1. Tax-free investment gains
The money in your HSA can keep growing during your retirement. As is the case with a Roth IRA or 401(k), investment gains in an HSA are tax-free. That's a nice perk at any age.
2. Tax-free withdrawals
Taxes can be a huge burden for retirees on a fixed income. The beauty of HSAs is that money removed for qualified healthcare expenses isn't subject to taxes. So whether you're looking at a $1,200 bill for a diagnostic test or a $300 tab for prescriptions, you can tap your HSA to cover those costs without worrying about the IRS coming after a portion of the withdrawal you take.
3. Penalty-free withdrawals, come age 65
The whole purpose of an HSA is to have money on hand for medical expenses. So as you might imagine, penalties do apply when you take an HSA withdrawal for non-healthcare purposes. Those penalties, however, go away at age 65.
Once you turn 65, non-medical HSA withdrawals won't be penalized. If you need cash to fix your house's roof or repair your aging car, you can tap your HSA without having to worry.
In that situation, however, your withdrawals will be subject to taxes. That could read like a penalty of sorts since you won't get your money in full. However, it basically makes your HSA function like a traditional IRA or 401(k) plan where withdrawals in retirement are always taxed, no matter what the money is used for.
It pays to keep HSA funds on hand for retirement
Having access to HSA funds during your working years could make your medical bills easier to manage. But if you really want to make the most of your HSA, do what you can to leave your balance intact until retirement arrives. You're apt to appreciate that money a lot more later in life when you're on a fixed income and your medical costs are (most likely) higher.
This isn't to say that you should take on credit card debt to cover near-term medical bills because you're eager to leave your HSA alone as long as possible. That doesn't make sense. But if you can afford your healthcare bills year after year, it definitely pays to avoid HSA withdrawals so you're able to bring as large a balance as you can with you into retirement.
