One of the coolest financial products out there is a Health Savings Account (also known as an HSA). An HSA can help you pay for medical bills that you incur while saving taxes as well. But, there is another level of coolness that these products have. That is when you can use an HSA for retirement. When you do this, it is TRIPLE TAX FREE! Here is how it works.
How an HSA Works
If you are unfamiliar with an HSA, here is how it works in a nutshell.
An HSA is a savings account that you can have if you have a high deductible healthcare plan. You can then use that money to pay for medical expenses that you incur.
The money that you put into an HSA is not taxed as long as it is used for medical purposes.
When you put your money into an HSA, you can choose to invest it or not. If you choose not to invest it, it will basically sit in the account and not grow (very much) similar to if it was in a savings account at your bank.
If you choose to invest it, it will go up and down with the market based on how it is invested. The interest that it gains is also tax free if it is used for medical purposes when it is later taken out.
That is basically how it works. However, there are some nuances and things to consider.
For a deeper dive into how an HSA works, check out this article that I wrote.
The Type of Person That Should Use an HSA for Retirement
Although HSAs are awesome tools, not everyone should use them for retirement.
If you are struggling with saving for retirement already you probably shouldn’t concentrate on using an HSA as a retirement vehicle. Also, if you don’t already have a fully funded emergency fund the same would be true. And the biggest box that you need to check would be that you need to have the extra money to pay for medical bills as you incur them.
The person that would get the largest benefit of using an HSA for retirement is the person that fits can answer “yes” to all of these questions.
- Do you have at least a 6 month emergency fund?
- Have you maxed out all other employer sponsored retirement vehicles?
- Do you have EXTRA money to pay for medical bills as they are incurred?
- Will you keep good records of your medical expenses for a long time?
If you answered “yes” to all of those questions, then using an HSA for retirement might be a great tool for you. Read on.
How to Use an HSA for Retirement
Using your HSA as a retirement account is like sending your finances into hyper-drive.
As I said in other articles, you can let your HSA pile up year after year and you can have the money invested as well.
If you do this, over time you will have a really big HSA account lying around.
If you have reached at least age 59 ½, you can take that money out of the HSA for ANY reason that you want and avoid the 20% penalty. However, you will have to pay taxes on the money that you take out if it is for something other than a qualified medical expense. (At this point, it works pretty much the same as a 401k.)
If you then want to take money out of that account (before retirement or after retirement) and you don’t want to be penalized or taxed on it you have to do this:
- Pay for your qualified medical expenses out of funds OTHER than your HSA (through your checking account or a credit card, etc.) throughout the years that you have your HSA.
- Save ALL of your receipts from those qualified medical expenses (they can be saved digitally if you like).
- Reimburse yourself for all of those YEARS of medical expenses tax free!
It is really awesome. Seriously.
And this can be done BEFORE you reach 59 ½. 🙂
Let’s go over an example of a hypothetical person, Jerry.
Jerry is 25 and he has a high deductible health plan that allows him to have an HSA. Jerry is single and never gets married and contributes the $3,000 to the HSA each year. The HSA grows at 8%.
Every time that Jerry has to go to the doctor or have a health expense, he pays for it with a credit card instead of using his HSA. He incurs $2,500 each year of medical expenses and saves all of the receipt in the cloud.
At any point, Jerry can reimburse himself for his medical expenses in this year and/or previous years.
When Jerry is 45, he decides to take several months off to hike the Appalachian Trail. He then can reimburse himself for 20 years of medical expenses and it is TAX FREE even though he is not at retirement age yet!
This is what it looks like:
| Amount Invested Annually | $3,000 |
| Years Invested | 20 |
| Total Amount Invested | $60,000 |
| Growth Rate | 8% |
| Total Amount in Account | $137,285 |
| Amount of Qualified Medical Expenses | $50,000 |
| Amount Withdrawn | $50,000 |
| Taxes on Withdrawn Amount | $0 |
| What is Left Over in His HSA | $87,285 |
That means that the account would STILL have $87,285 left over in it after he withdraws his previous medical expense amount!
This is a really awesome tool. 🙂
Final Thoughts
Using an HSA for retirement is an AWESOME way to send your investing into hyper drive.
But don’t jump the gun and use it too early in your investing journey. Make sure to have an emergency fund, max out your other employer sponsored retirement plans first, and have the money set aside to pay for your medical bills out of pocket.
You can do this!
I am here for you!
Until next time!
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