The right way to rework your HSA into the last word funding car

Well being Financial savings Accounts (HSAs), because the identify implies, assist folks save for medical bills. —and lots of can double as triple tax-advantaged investing accounts. 

Earlier than we stroll you thru these tax benefits, and the “shoebox” technique that unlocks them for retirement, right here’s an vital caveat upfront: You may solely contribute to an HSA by assembly a number of necessities, specifically being enrolled in a excessive deductible well being plan (HDHP).

This kind of medical insurance isn’t for everybody. It comes with the potential for prime out-of-pocket medical prices, so it is usually greatest suited to more healthy people. However if you happen to discover an HDHP is sensible to your scenario, contemplate opening an HSA. Then strap in for some unparalleled tax remedy.

How the small-but-mighty HSA holds its personal

Relative to the 401(ok) and IRA, an HSA has modest contribution limits of $4,150 for plans with particular person protection and $8,300 for these with household protection. That is as of 2024.

However these {dollars}, when invested, pack a a lot heavier punch. As a result of whereas 401(ok)s and IRAs include both tax-deferred contributions or tax-free withdrawals, HSAs supply each. Toss in tax-free progress, and that’s the place the “triple” in triple tax-advantaged comes from.

Do not get us fallacious; two tax perks are nothing to sneeze at. In some circumstances, akin to when matching cash is on the desk, you seemingly ought to begin filling up your 401(ok) first.

However an HSA could make for an ideal addition to your lineup of retirement accounts. Here is how one can make it occur.

Unboxing the HSA shoebox technique

When you’re enrolled in an HDHP, you’ll be able to open an HSA both by means of your employer or by yourself earlier than contributing to it and investing the funds. Just like 401(ok)s, an HSA is yours and stays with you after you allow your job. 

From there, repurposing its tax benefits for retirement boils down to 3 easy steps:

Step 1: Save your receipts

Right here’s the place the “shoebox” technique will get its identify. A key characteristic of HSAs is there’s no time restrict for getting a certified medical expense (QME) reimbursed. That’s how a surgical procedure in your 40s can change into retirement revenue in your 60s. Simply maintain your QME receipts stashed safely in a shoebox, folder, you identify it. And keep in mind, any bills you racked up earlier than you opened an HSA aren’t eligible for reimbursement. 

Step 2: Do nothing

Depart your HSA investments untouched and let compound progress do its factor. Contemplate paying for routine medical bills with money readily available, and build up an emergency fund as a hedge towards dangerous luck and that top deductible you signed up for.

Step 3: Come retirement, money in

Years and even a long time down the highway, when the time comes to start out tapping into your HSA for retirement revenue, merely begin cashing in these QME receipts. As we talked about earlier, there is not any time restrict for getting reimbursed, so you’ll be able to wait so long as you need or want earlier than making tax-free withdrawals. 

You may technically use your HSA penalty-free for something, no receipts required, after you flip 65. However crucially, these non-QME withdrawals depend as taxable revenue, negating considered one of your HSA’s three valuable tax benefits.

See all of your retirement accounts—HSA included—side-by-side

If or when the time comes so that you can arrange an HSA, you’ll be able to take advantage of it for retirement. And by connecting your exterior HSA account to Betterment, you’ll be able to see it side-by-side with all the opposite accounts in your retirement objective. It might not add a lot to your general stability to start with, however with time—and triple the tax benefits—which will change quickly sufficient.