HSAs: The Most Underrated Retirement Account

Background

When I started my first job out of college, I was offered several health insurance plans — PPO, EPO, HMO, HDHP — so many acronyms! As a fresh graduate who hadn’t learned anything related to health insurance in school, I was very lost.

After a lot of research and pro/con weighing, I ended up choosing an HDHP so I could open an HSA. Here, I’d like to shine a light on the following:

• HSAs can be excellent investment vehicles
• The HSA triple-tax-advantage
• Pros/cons of the HSA
• How to decide if an HSA is right for you

What is an HSA?

Health Savings Accounts (HSAs) are savings accounts that provide huge tax advantages when used for health-related expenses.

They are triple tax-advantaged (more on that below), making them an underrated investment vehicle and potential addition to your retirement portfolio.

The Triple Tax-Advantage

Contributions: You contribute to your HSA with pre-tax dollars, meaning your HSA contributions reduce your taxable income and thereby reduce your tax liability.

Growth: HSAs are not taxed on interest or investment growth either, so your HSA has the potential to grow tax-free for decades.

Withdrawals: You pay no tax when you withdraw funds from your HSA, as long as you use them for qualified medical expenses.

You might recall that common retirement accounts such as traditional 401(k)s, Roth 401(k)s, and Roth IRAs are also tax-advantaged. The difference between those and the HSA is that you are still taxed at some point with those accounts. For example, the traditional 401(k) allows you to avoid tax upon contribution, but you still have to pay tax upon withdrawal. Similarly, the Roth IRA allows you to avoid tax upon withdrawal, but you still have to pay tax upon contribution.

Unlike those retirement accounts, for HSAs, you pay no tax on contribution, growth, or withdrawal for qualified medical expenses.

In other words, your HSA can become an additional triple tax-advantaged retirement fund that you can set aside…