Health Savings Account (HSA): An Alternate Retirement Account

By Miranda Marquit

As you save and invest for retirement, putting some of your money in a tax-advantaged account can be a good choice. While you might have an idea of using an IRA or 401(k), you might know about an alternative: the Health Savings Account (HSA).

Using an HSA as part of your retirement planning can be one way to increase the amount of tax-advantaged dollars you have for the future. Here’s what you need to know.

What is a Health Savings Account (HSA)?

A Health Savings Account is a type of tax-advantaged account designed to help you save up money for healthcare expenses. Contributions you make to your HSA are pre-tax. On top of that, withdrawals from the account are tax-free as long as the money is used for qualified medical expenses.

In order to qualify for an HSA, you need to have a high-deductible health plan (HDHP), however. There are also limits to how much you can contribute each year, based on what the IRS suggests and whether it’s an individual or family plan.

Before signing up, you need to verify that you’re eligible for an account.

You might be able to get an HSA through work or get an individual account if your work doesn’t sponsor an HSA version of a plan.

Traits of an HSA

There are some desirable traits of an HSA that can make it a reasonable choice for some investors.

  • Roll over year-to-year: Funds in an HSA roll over each year. You don’t have to worry about using them or losing them. In fact, this quality is what makes an HSA desirable as an alternate retirement account since you can continue to accumulate money in the account.
  • Portable account: If you have an HSA set up through your work, the money in the account remains yours. You can bring it with you as you change jobs, unlike with other accounts like an HRA or FSA.
  • Easy to access your healthcare dollars: Many HSAs come with a debit card. As a result, it’s easy to simply swipe when paying for qualified expenses. You can also pay out of pocket, keep the receipt and upload to your account for reimbursement.
  • Investment: Finally, you can usually invest a portion of the money you have in an HSA. This allows the account to grow more over time. And, as long as you withdraw the earnings for use on qualified expenses, you won’t have to worry about paying taxes.

While an HSA isn’t ideal for everyone, it can work well for some people, especially those that can handle paying a higher deductible.

How an HSA Acts as an Alternative Retirement Account

So, you can see how an HSA can be useful as a healthcare account. But what about using it for retirement?

There are a couple of approaches you can use when it comes to using your Health Savings Account as an alternate retirement account.

Pay out of pocket now, reimburse yourself later

One strategy is to pay out of pocket for expenses today and submit for reimbursement later. There’s no time limit for reimbursement. So, you could pay out of pocket for two or three decades, save your receipts and then submit for reimbursement at once. Over time, that might add up to a chunk of change. You can then take that money from your HSA, tax-free, and put it into a different account.

Use your HSA as a retirement healthcare account

You can also simply just use your HSA to pay for your healthcare costs during retirement. An HSA can be used for copays and coinsurance, as well as to purchase over-the-counter items and health aids. You can use it to pay for prescriptions. It’s even possible to use your HSA to cover Medicare premiums.

Some people decide to invest a portion of their HSA dollars over time so that their account balance grows and they can potentially have a good-sized portfolio to draw from to cover healthcare costs tax-free later.

An HSA as a backup IRA

In general, if you withdraw money from your IRA for non-qualified costs, you’ll be stuck paying a 20% penalty plus having that amount added to your income taxes for the year. So you’ll be stuck paying applicable taxes and penalties.

However, once you reach age 65, your HSA can act as a backup IRA. You won’t have to pay the penalty if you use the money for non-qualified expenses. You still have to pay taxes, as you would for a traditional IRA, but you aren’t stuck with a penalty.

Bottom Line

An HSA can be a valuable addition to your retirement planning. Consider whether a Health Savings Account makes sense for you. Then figure out if you can invest some of the money and include it in your future retirement plans.