By: Wayne Dugan

Regarding retirement planning, most people focus on accounts like IRAs and 401(k)s. Those who go beyond these core options usually focus on making additional stock market investments that allow them to accumulate wealth over time, thanks to the returns on their contributions. However, another frequently overlooked option can aid your retirement planning: your health savings account.

I recently interviewed Ramsey Brock, president of Brock Asset Management, about this topic. As he explains, health savings accounts can offer several noteworthy advantages in retirement, in addition to covering current healthcare needs.

1. A ‘Triple Tax Advantage’

“Health savings accounts are often referred to as having a triple tax advantage,” Brock explains. 

“You can contribute to them with pre-tax dollars by taking a payroll deduction. Contributions that remain in the account grow tax-free. And finally, as long as you withdraw for a qualified medical expense, the withdrawals are also tax-free. This is a valuable solution for helping you prepare for a key aspect of retirement with a minimal impact on your tax burden.”

Health savings accounts opened outside of an employer-sponsored arrangement are typically funded with after-tax dollars, but these contributions can be deducted from your tax filings.

2. Ability to Invest HSA Funds

A health savings account isn’t just for stocking money to cover health expenses. Brock explains, “You can invest your HSA funds in mutual funds, individual stocks, or ETFs. While the availability of these investments can vary between different types of HSAs, this allows you to grow your money much faster through compounding gains. However, even a standard HSA can help you grow your money by generating interest on the funds you leave in the account yearly.”

Even when invested, funds in an HSA grow tax-free. When withdrawn for medical expenses, this may result in thousands of dollars saved by not needing to pay taxes on the withdrawal.

3. Employer Contributions

Another noteworthy aspect of HSAs is that many employers will also contribute to your health savings account. Typically, employers make these contributions contingent upon employees completing other health and wellness programs that the company is trying to incentivize.

“Any contributions your employer makes to your HSA counts toward the annual contribution limits set by the IRS, but you should take advantage of these contributions if they’re available,” Brock says.

“Any contributions your employer makes means more money in your HSA that may grow over time and more money that you may use to cover your current expenses or contribute to another retirement account.”

4. Save for Future Health Expenses

Because the unused money in a health savings account can carry over from year to year, these accounts are an excellent vehicle for preparing for the healthcare expenses that inevitably occur during retirement. These expenses tend to be much higher than most retirees anticipate, with CNBC reporting that the average 65-year-old retired couple will spend an average of $315,000 on healthcare in retirement.

If you are paying for these expenses with funds from another retirement account, you will usually have to pay income tax on your withdrawal before applying the funds to healthcare costs.

Because qualified withdrawals from a health savings account are tax-free, retirees can use these funds to cover insurance deductibles, Medicare premiums, hospital and physical therapy bills, copayments, x-rays, and more, avoiding taxes on these essential needs.

5. Reimburse Earlier Healthcare Costs

In addition to covering new medical expenses, HSAs can be used to reimburse medical expenses you have already paid. These reimbursements are not taxed as long as the funds from your HSA are used to reimburse a medical expense after you open the account. 

While this requires keeping receipts for all medical expenses, this can be a valuable way to add extra money to your bank account if you feel you have more money in your HSA than is necessary.

6. Cover Other Expenses

While a health savings account should primarily be used to cover healthcare expenses in retirement, Brock notes that it can also be used to help with other expenses if needed.

“After you turn 65, you may use the funds in your health savings account for any non-qualified expenses,” he explains. “There is no penalty or limitation on withdrawing funds for other purposes at this point — even for things like travel. However, you must pay income tax on withdrawals made for these expenses. Because of this, it’s good to consider the health savings account as something that should primarily be reserved for addressing current and future health costs. Only use HSA funds for non-medical expenses if you need to.”

A Surprising Retirement Solution

As these points illustrate, a health savings account can be a powerful asset when planning for and entering retirement. By strategically using a health savings account, you can take advantage of notable tax advantages that allow you to grow some of your money tax-free, giving you access to even more of your hard-earned money to cover healthcare needs in retirement.

Disclaimer: This content is for informational purposes only and is not intended as financial advice, nor does it replace professional financial advice, investment advice, or any other type of advice. You should seek the advice of a qualified financial advisor or other professional before making any financial decisions.

Published By: Aize Perez