A Powerful Yet Overlooked Tool

There are several types of tax-advantaged savings accounts designed to help you prepare for retirement. While many people are familiar with options like 401(k)s and IRAs, one that is often overlooked is the Health Savings Account, or HSA. Though primarily created to help cover healthcare costs, an HSA can also serve as a valuable long-term retirement savings tool.

What Is an HSA?

A Health Savings Account (HSA) is a tax-advantaged savings account used to pay for qualified medical expenses. If you’re enrolled in a high-deductible health plan (HDHP), your employer may offer an HSA as part of your benefits package. This account gives you the flexibility to save money for healthcare costs, both now and in retirement.

How an HSA Works

Contributions to an HSA are made pre-tax, which lowers your taxable income. Any unused funds and earnings grow tax-deferred, and when used for qualified medical expenses, withdrawals are tax-free. This means an HSA offers triple tax advantages:

• Pre-tax contributions
• Tax-deferred growth
• Tax-free withdrawals

Investing Through Your HSA

Once your HSA reaches a certain balance, you may have the option to invest the funds. This allows for growth potential that helps your savings keep up with inflation—especially important as healthcare costs continue to rise.

HSAs in Retirement

HSAs can play a key role in retirement planning. Medical expenses tend to increase with age, and using your HSA funds for qualified medical costs in retirement allows you to avoid paying taxes on those withdrawals. If you’re over age 65, you can even withdraw funds for non-medical expenses, but they’ll be taxed like regular retirement income similar to a traditional IRA.

Unlike other retirement accounts, HSAs do not require Required Minimum Distributions (RMDs), giving you more control over when and how you use your funds.

HSA vs. Retirement Plan: Which Comes First?

If your employer offers both a retirement plan and an HSA, the good news is you can contribute to both. Start by ensuring you’re saving enough in your retirement plan to receive the full employer match. Then, you can begin contributing to your HSA.

Keep in mind:

• HSA contribution limits are lower than retirement plan limits.
• If you’ve maxed out your HSA and still have room in your budget, consider contributing more to your retirement plan.

Estimating Healthcare Needs

As you plan, think about your future healthcare needs. If you anticipate higher medical expenses due to current health conditions, prioritizing HSA savings may be wise—while still securing your retirement plan’s match. Planning this way helps ensure you’re covered both medically and financially in retirement.

Final Thoughts

A Health Savings Account is more than just a way to pay medical bills it’s a powerful, tax-advantaged savings vehicle that can complement your retirement strategy. If you have access to one, make sure you’re taking full advantage of this opportunity.