To Make Your HSA Roar Like a Hotrod, Follow These 10 Rock-Solid Strategies
Maximize the retirement tool most people miss
Looking at the title of this article, you're probably thinking: “Hotrods and HSA’s really don’t mix, hoss.”
Wrong.
You can fine-tune those healthcare spending accounts to power GenXer’s over the retirement finish line.
Some companies offer HSAs (Health Savings Accounts), and I would take advantage of these plans even if they seem more expensive.
If you're an individual or self-employed, you might think you're out of luck. Not so.
To open an HSA account, you must enroll in a High-Deductible Health Plan (HDHP).
The problem is that HSAs are overlooked as a retirement planning tool.
Most people who have HSAs use them as a simple turnkey for healthcare spending.
If you know how to lock their potential, HSAs are actually one of the most powerful ways to build long-term wealth.
Shhh… the triple tax advantage is an awesome secret
The triple tax advantage makes HSAs special—they're the only savings account type offering this feature.
What is the triple tax advantage?
It means that contributions are tax-deductible, the growth of those contributions is tax-free, and withdrawals from that account for qualified medical expenses are also tax-free. This makes HSAs even more tax-efficient than 401(k)s or IRAs.
Let's rattle through ten strategies to turn your HSA into a serious vehicle for retirement.
“You just can't stay seventeen forever.”—Steve Bolander in American Graffiti
Strategy 1: Maximize contributions for a no-brainer tax move
You can contribute sizable amounts to an HSA. You can leverage these savings with the triple tax advantage. 2024 is almost at an end, but you can contribute up to $4,150 for individuals or $8,300 for a family. Like a 401(k)s or IRAs, you get an additional $1,000 catch-up contribution if you’re 55 or older. Shoot to fill these buckets, and you’ll enjoy retirement benefits.
Strategy 2: Use your HSA as your investment vehicle
HSAs are cloaked as retirement accounts and shouldn't be treated like regular checking accounts. Mutual funds, ETFs, and index funds are just some of the options that HSA providers offer, which means these savings can grow like your other investments over time. By investing in HSAs instead of keeping them in a high-interest savings account, you’re giving your HSA the chance to become a significant part of your retirement.
Strategy 3: Be smart and bank your receipts
This might go against common wisdom - try to pay for medical expenses when you can. If you don't tap the HSA account, you can keep that money invested and grow tax-free. As a bonus, you can reimburse yourself later if you save your receipts. And you can even recoup those funds in several years—you don't have to pay yourself back immediately or in the current year. During this time, your HSA balance has been growing and compounding.
“This is your receipt for your husband... and this is my receipt for your receipt.”—Arresting Officer in Brazil
Strategy 4: Make it part of your retirement plan
If you have an HSA, consider it a cornerstone in your retirement strategy. You can compartmentalize your retirement accounts—your traditional retirement accounts can cover general expenses, and you can use your HSA just for healthcare. If you set up your accounts in this way, you can assign specific expenses to these accounts and get accurate cost breakdowns.
Strategy 5: Cover Medicare costs the smart way
One interesting benefit of HSAs is that they can pay for Medicare premiums tax-free. If you pay Medicare Part B, Part D, and Medicare Advantage premiums, these can all be paid by HSA funds. Having a dedicated, tax-free pool of money to handle those healthcare costs can make a big difference since healthcare costs usually increase with age.
Strategy 6: Build your long-term care safety net
We've talked about long-term healthcare and HSAs, which can cover qualified insurance premiums, and the amounts you can pay with these funds increase as you age. This is how you can plan for one of the biggest potential costs in retirement that is now tax-efficient. Statistics show that up to 70% of people over 65 will need some form of long-term care, so this strategy should be considered.
“I reckon you've got to try a few things in life without a safety net. How else are you gonna know you're alive?”—Jack Devlin in The Net
Strategy 7: Skip the RMDs with HSAs
Once you hit your early 70's, you must take the required minimum distributions from your retirement funds (RMDs). HSAs are an exception to this rule—they don’t require minimum distributions like 401(k)s or traditional IRAs. This gives you more control over how and when you use these funds, so you’re not forced to start drawing down your balance at a certain age. This is an excellent tool for people who want to take a more strategic approach to retirement spending.
Strategy 8: Unlock new benefits after age 65
Your HSA becomes like a Swiss Army knife after age 65. When you hit this milestone you can withdraw funds for non-medical expenses without penalty. You’ll only pay ordinary income tax, similar to the percentages associated with a traditional IRA. Withdrawals are still tax-free for medical expenses. Your HSA becomes a backup retirement account with added tax perks for healthcare.
Strategy 9: Don’t skip the catch-up contributions
$1,000 may seem like a small amount, but once you turn 55 it can make a real difference. You can double your tax-advantaged savings if you and your spouse is over 55 since each of you can contribute to your own HSA with catch-up contributions. This means each year, you can sock away an additional $2,000 in tax-advantaged savings. If these savings compound over several years it can start to gain traction in your HSA account.
Strategy 10: Create a medical slush fund
You'll always run into emergencies, but you now have a dedicated funding source through your HSA to deal with any health issue that comes up. With the HSA, you have tax-advantaged funds specifically for medical needs already stashed away which can help you sleep at night. Your regular emergency fund can stay intact and it can take care of other common costs (like that roof damage after a big storm).
“This is an intergalactic emergency. I need to commandeer your vessel to Sector 12”—Buzz Lightyear in Toy Story
Final thoughts: Keep a Long-Term Mindset
As with anything related to retirement, you need to keep a long-term perspective, and maximizing your HSA (if you have one) should be a key part of that.
Although you have healthcare needs now, treating the HSA as one of your retirement accounts can provide you with a nice cash cushion later in your retirement. We've all seen the statistics on healthcare costs and how they will take a bigger portion of the retirement pie. Allocating funds from your HSA can help pay for healthcare expenses without compromising your lifestyle.
If you start maximizing your HSA with these strategies you’ll be setting yourself up for a more comfortable retirement. HSAs are one of the most underrated wealth-building tools out there.
@Chris, I love our HSA. But the running joke in our family is that it is a Health "Spending" Account vs a Health "Savings" Account. Meeting the annual contribution limit is systematic. But with high deductibles and young kids at home, the hard part is not spending it.