This article, originally entitled "5 Reasons a Health Savings Account Is a Great Place to Stash Retirement Cash," comes from partner site Money Talks News.
Millions of savers overlook one incredibly underrated way to add extra oomph to their efforts to build a nest egg.
The health savings account is a great place to save for today’s medical expenses. But it might be an even better place to stash cash for your golden years. Here are some key reasons to consider using an HSA to save for retirement.
1. It’s triple tax-advantaged
A health savings account’s huge selling point is the fact that it is triple tax-advantaged:
- You get a tax deduction during the year of contribution.
- The money grows tax-free.
- You withdraw the money tax-free when it’s used for qualified health expenses.
In essence, if you use HSA money to pay for health care expenses, it’s never taxed. Never. It’s tough to think of any other savings vehicle that offers such a powerful combination of tax incentives.
2. It can be a back-door IRA
This is one of the most overlooked — and misunderstood — advantages of the HSA. Many people think the HSA must be used to pay for medical expenses.
In fact, once you reach the age of 65, you can withdraw your HSA funds for any reason. Just as with a traditional IRA, you will pay income taxes on the withdrawal at that point. However, you will not pay any penalties. As the IRS states in 3. There’s a sneaky way to avoid those taxes
If the idea of paying taxes on nonqualified withdrawals rubs you the wrong way, there is something you can do to eliminate such fees. But it probably only works if you are a super-saver who delays using HSA funds for many years.
Some people who open an HSA account pay for their annual medical expenses out of pocket from taxable accounts instead of using their HSA funds. This allows the HSA money to continue to compound tax-free for years, and hopefully even decades.
Every time these super-savers rack up a new medical expense, they write a check to cover the bill. Then, they take their medical receipts and quietly file them away.
Why? Because as it turns out, you can ask for reimbursement of your medical expenses at any point during your lifetime. According to IRS Publication 969:
You are permitted to take a distribution from your HSA at any time; however, only those amounts used exclusively to pay for qualified medical expenses are tax free.
The key phrase, of course, is “at any time.” So, as long as your expense was a qualified medical expense — and you did not receive reimbursement or a deduction for it previously — you’re golden, even if you make a withdrawal to reimburse costs incurred decades earlier.
While news outlets such as Forbes and CNBC have written about this strategy, it remains largely under the radar. Theoretically, you could decide to buy a car when you turn 65 and fund much or all of the purchase by using thousands of dollars in tax-free HSA money. To do so, you simply have to make sure you can produce those receipts from yesteryear. Pretty neat — and totally legal — trick.
4. It helps trim your medical costs today, as well in the future
Everyone knows health care costs have exploded in recent years. In 2016, the average American spent $1,400 in out-of-pocket medical expenses, up from $250 annually in 1980, according to Kalorama Information. a New York-based health care market research publisher.
An HSA can help mitigate some of this financial pain by providing you with an upfront tax break that returns a modest amount of such soaring costs to your pocket.
And you get that tax break now even if you don’t actually tap your HSA funds until years into the future. So, the HSA remains a great way to trim ever-growing health care costs, both now and in retirement.
5. It can be a great estate-planning tool
When you die, your health savings account does not travel with you to the great beyond. Instead, it remains behind on this earthly plane and can be used by loved ones to make their lives better.
If you name a spouse as a beneficiary, he or she will inherit the HSA and will be able to use it just as you did, with a right to tax-free distributions for qualified medical expenses.
If you leave the money to someone else, it will be distributed to your heirs and will be fully taxable.
What is your favorite way to save for retirement?