What is a health savings account?

An HSA is both a means of covering qualified healthcare expenses and a savings vehicle that can help you cover both medical and non-medical expenses in retirement. First, if you’re enrolled in an HSA through your job and it’s funded through regular payroll deductions, this will reduce your taxable income and help you save money each year.

Or, if you make a contribution with post-tax funds, you can deduct these contributions from your gross income on your tax return, which could also save you money annually! But where HSAs really shine is their triple-tax benefit. Here’s how it works:

• HSA contributions are not taxed
• There’s no tax on interest earned or growth through investment
• There’s no tax on HSA withdrawals for qualified health expenses

But this goes even further when you start to analyze an HSA’s retirement potential. HSA funds roll over year to year, so any unspent funds will accumulate over time. You can withdraw these funds for non-medical expenses, but we don’t recommend it, as you will have to pay a 20% penalty on that amount back to the IRS plus payroll taxes on the amount.

Here’s where things get very interesting. Once you reach age 55, you can add a “catch up” contribution, which allows you to add up to $1,000 to your HSA above the yearly contribution limit. Once you reach Medicare eligibility at age 65, something amazing happens - the 20% tax penalty for non-medical expenses is waived.

Once you reach 65, the tax benefit still holds — there’s no tax on withdrawals for qualified expenses, but withdrawals for non-medical expenses are taxed as income. If you’ve been diligently saving throughout the course of your career, an HSA can provide a massive supplement to traditional retirement savings accounts to bolster your long-term savings potential.

Finally, HSAs are a fantastic introduction to investing. Depending on your sense of risk and adventure, HSA funds can be invested in stocks, mutual funds or other assets through a variety of banks and brokerage services, all of which can help account holders grow this asset at a much faster rate than via interest alone.

Additionally, because individuals and families can have more than one HSA at once (as long as they both do not exceed the yearly contribution limit), they could theoretically use one for covering health costs, while the other is primarily for investing.