Can you use an HSA to save for retirement?

Medical filesPhoto courtesy of Becky Wetherington

Last time, I talked about the health savings account (HSA), and how it offers an unprecedented triple-tax advantage: the money you contribute for qualified medical expenses is tax-free, grows tax-free, and can be withdrawn tax-free.

It’s like your own little shell company in the Cayman Islands.

This photo was taken from offshore…get it? Source

Now, the important point here is that the HSA must be used for qualified medical expenses. If you don’t use it that way, say if you raid the account to pay for a trip to the Cayman Islands, you will have to pay income taxes on the withdrawal, and most likely also a 20% penalty.

So if you took out $5,000 from your account, and had a median household income, you’d have only about $3,000 after all was said and done.

So don’t do that, obviously.

But even saying that, can you use an HSA, with all of its tax-advantaged goodness, to save for retirement?

The answer is: sort of.

Medical expenses can be the death of us

Did you know that medical bills are the #1 cause of personal bankruptcy in the U.S.?

In some ways, this shouldn’t be too much of a surprise. Medical costs are huge now and are largely spiraling out of control, and this isn’t going to change anytime soon.

But here’s something you might not know. According to a study done in 2004, roughly half of all personal medical expenditures happen in a person’s life after age 65.

That means that if you’re around the typical retirement age, you still likely have half your lifetime medical costs still to come.

What does this have to do with the HSA?

Let me ask you this: Where is all that money going to come from?

Well, it’s going to come from you, of course.

And if you’ve prepared in the way that I talk about on this site, you should likely have money in your retirement accounts enough to cover these expenses.

But here’s the thing: you also could use money from your HSA.

If you’re 35 years old and you put in $3,000 a year into an HSA, you will have $90,000. And that’s if you’ve used an HSA that acts like a savings account. Some HSAs can act like an investment vehicle, allowing you to invest your money in mutual funds, potentially netting you 2-4x more in earnings.

And remember, this is all tax-free when used for qualified medical expenses.

Since medical expenses are such a big part of retirement costs, funding an HSA separate from your normal retirement accounts could net yourself hundreds of thousands of dollars that can be used for medical costs, saving your other accounts from being depleted.

In effect, the HSA indirectly allows you to save for retirement because it can keep your retirement earnings from being used for medical costs.

And all accounts, retirement or otherwise, have limits on yearly contributions, this is another account you can fund, even if you happen to max out your Roth IRA and/or 401(k).

Think of the HSA as another retirement account

Do you really think you can have too much medical savings? I doubt it. Recall that the money you put in today you don’t have to use now, but can use decades down the road.

In short, I don’t see any reason why everyone wouldn’t want to put in as much as they can afford into an HSA every year. You may not use it right away, but count on it, you will be glad you have it in the future.

Mike Pumphrey

Mike Pumphrey

I'm the founder and author of Unlikely Radical, a site to help people succeed with money, achieve their goals, and live intentionally.

I offer a free phone consultation to anyone who is interested in changing their financial narrative. Are you ready? Click here for details.
Mike Pumphrey
Posted on October 19, 2017