Using Your HSA as a Long-Term Savings Vehicle
When it comes to long-term savings, a few vehicles come to mind—401(k), traditional or Roth IRA, or a taxable investment account. But for those who have a qualified high-deductible health plan (HDHP), a health savings account (HSA) can be an incredible tool to reduce your federal income tax liability now and provide tax-free growth in the future.
Unfortunately, not everyone is aware of how powerful the HSA can be. In a recent Alegeus survey, only 17 percent of respondents reported that they were investing their HSA funds for growth, and less than half of all respondents (42 percent) were even aware that HSA funds can be invested.1 By educating employees on how an HSA can help boost their retirement income or cover future medical expenses, companies can improve overall employee financial wellness. Below we'll discuss some of the unique advantages an HSA can offer.
What Makes the HSA Different?
The term HSA is often used interchangeably with Healthcare FSA—Healthcare Flexible Spending Account. But unlike the Healthcare FSA, which usually has a "use or lose" provision that won't allow unused funds to be rolled over, an HSA is durable. Though you can only contribute to an HSA while you're enrolled in a qualified high-deductible health plan, you can keep and spend your HSA funds even after you no longer have a qualifying HDHP. This means that if you have an HSA-eligible plan early in your career, you can leave these funds to grow until retirement.
- Just a few of the advantages of an HSA include:
- Funds aren't subject to federal income taxes going in or going out as long as they're spent on eligible medical expenses.
- HSA contributions can reduce your taxable income and your overall tax rate for federal income tax purposes. State income tax treatment may vary. Check with your advisor.
- For HSA funds that are invested in the stock market, gains aren't subject to capital gains taxes.
- After the HSA holder turns 65, funds can be withdrawn and spent on non-medical expenses (though only funds spent on eligible medical expenses will be tax-free).2
- An HSA's unique federal income tax status makes it unlike any other retirement savings vehicle. The one that comes closest is likely a Roth IRA, due to its tax-free growth and withdrawals; however, an HSA is entirely tax-free when used to pay for eligible medical expenses, while Roth contributions are made post-tax.
How an HSA Can Factor Into Long-Term Savings
Because of the flexibility it offers, an HSA can be a important tool in any worker's retirement arsenal.
Before retirement, an HSA can be invested in stocks, bonds, or other assets, depending on the options available from your HSA administrator. This allows account holders to take advantage of market gains without incurring any capital gains taxes. After retirement, an HSA can be tapped to cover health-related expenses and, after age 65, even withdrawn to cover regular living expenses.3 You may even be able to use your HSA as a springboard to early retirement by helping fund COBRA premiums before you qualify for Medicare at age 65.4
Although account holders who spend HSA funds on non-medical expenses after turning 65 will owe taxes on any amounts withdrawn for this purpose, the benefit of decades of tax-free growth is tough to match.
This blog is up to date as of December 2021 and has not been updated for changes in the law, administration or current events.
HSA Store
Shop for Eligible Items on the HSA Store
You may purchase HSA-eligible items online at the HSA Store. Browse medical supplies, over-the-counter medication, prescriptions, and more.
