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HSAs as a Supplement to Retirement Savings

Health Savings Accounts (HSA’s) are not a new thing, but many people still are not that familiar with how they work. Flex Spending Accounts (FSA’s) are still around and there is still confusion between the two because they do have similarities. One of the biggest differences between the two types of accounts is that the HSA does not have to be used by a specific time. (With FSA’s you have specific time to use the money for medical expenses or you lose it).

Because you do not have to use the money in the HSA, this opens opportunities to save for your retirement or unexpected medical expenses in the future. Here is a refresher about how HSA’s work; you can also check out a previous blog post.

  • Able to contribute when enrolled in a High Deductible Health Plan
  • Can use the money for medical expenses at any time (you do not have to be enrolled in the High Deductible Health Plan to use it)
  • Money goes in tax free and comes out tax free as long it is used for medical expenses (even some over the counter medications count). Check out the extensive list on the IRS site.
  • Does not have to used by a specific date
  • You name beneficiaries, so if you do not use it, your heirs can
  • You can take money out of the account after age 65 without penalty, you just have to pay income taxes (sounds like an IRA here).

This concept of using an HSA as a supplement to retirement savings works best if you have the extra savings to fund the HSA, you are a relatively healthy person who does not spend a lot on medical expenses, and you have time for the account to work for you (compounding). As you age, your medical expenses rise, and they become very costly in your senior years. If you can put some money away into an HSA account each year, invest it and save it, then you have a nice pot of money to use for medical expenses. Keep in mind, that if an emergency arises, the money is there for medical expenses at any age. If you do not need the money, then you have another tax deferred account (like an IRA) that can be used in retirement penalty free after age 65 or tax free at any time for medical expenses. There are contribution and income limits on retirement savings accounts. If you have a high deductible health plan, then you are adding another tax advantaged plan to your portfolio. HSAs are a great tool for medical expenses and tax deferred savings. This concept is just another way to look at them when thinking long term.

Financial Journey LLC is a registered investment advisor offering advisory services in the state of Virginia and in other jurisdictions where exempted. Information provided is for educational purposes only and not, in any way, to be considered investment or tax advice.

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