Using your HSA in retirement

by Erin Gobler, Chris B. Murphy, Hannah Alberstadt BLUEPRINT Originally posted on USA Today

Key points

• A health savings account has a triple tax advantage.

• After reaching age 65, you can make penalty-free HSA withdrawals for any purpose.

• Nonqualified distributions after you reach age 65 will be taxed at ordinary income rates.

You may already know that a health savings account can be an excellent tool to help you pay for out-of-pocket medical expenses. Anyone with a high-deductible health plan can contribute to an HSA, allowing you to save for medical expenses in a tax-advantaged way.

But the benefits don’t stop there. An HSA can also be a powerful retirement savings tool. Not only can you use it to pay for the high medical expenses many people incur later in life, but its flexibility allows you to use the funds for any purpose without penalty after reaching age 65.

Deciding to use your HSA to save for retirement takes forethought. You must weigh the benefits of using the money during retirement versus today to pay for medical expenses and make an investment plan to help the funds grow by the time you retire.

How to use your HSA in retirement

During retirement, you can make tax-free withdrawals from your HSA to pay for qualified medical expenses, including medical bills and other health care-related costs. You can even use the money to pay for your Medicare and some other insurance premiums, with the exception of a Medicare supplemental policy.

Using your HSA for qualified medical expenses offers the greatest tax advantage since you’ll pay income taxes on withdrawals used for other purposes.

But flexibility is the major benefit of using an HSA for retirement. If you need to dip into your funds to pay for nonqualified expenses, you can do so without incurring any more tax liability than you would using a traditional individual retirement account or 401(k).