Retirement Savings: 3 Ways To Use Your HSA in Retirement

by John Csiszar | Originally posted on Go Banking Rates

Health savings accounts aren’t nearly as popular as their more well-known counterparts like IRAs and 401(k) plans. Although their stated purposes are different — an HSA is supposed to help you pay your healthcare expenses, while IRAs and 401(k) plans are retirement accounts — they actually work in a fairly similar manner. All of these accounts allow for tax-deductible contributions, tax-deferred growth and, in some specific cases, tax-free distributions. So, what are the ways that you can use your HSA in retirement? Here are the three most important.

Use It as It Was Intended: To Help Pay Your Health Expenses

Generally speaking, it’s best to use accounts as they are intended. This is certainly true in the case of an HSA, which can be a triple tax-free account when used properly. First, contributions to your HSA are tax-deductible. Interest or earnings in your account are also tax-free. Lastly, if you withdraw funds from your HSA to pay for qualified medical expenses, you won’t pay tax on those distributions either. This can be a big boost in retirement, as Medicare and even private insurance won’t always cover all your medical expenses. Plus, the IRS definition of “qualified medical expenses” is fairly broad, ranging from hand sanitizer and aspirin to vision care and X-rays, among many others.

Use It Creatively: As a Supplemental Retirement Account

Health savings accounts weren’t originally conceived of as retirement accounts. However, they can function admirably in that capacity, with a few caveats. Although you can withdraw money from your HSA tax-free if it’s used for qualifying medical expenses, this doesn’t mean that you aren’t allowed to use it for other purposes. At any time, you can take money out of your HSA and use it to pay for anything you want. However, you’ll pay ordinary income tax on your distributions, and if you’re under 65, you’ll also owe an additional 20% penalty tax. This makes using an HSA for other than its intended purposes costly. However, if you’re 65 or older — or disabled — that 20% penalty vanishes, and you’ll only pay income tax on your withdrawals. In that sense, your HSA can operate just like a traditional IRA in some scenarios.