Why Health Savings Accounts (HSAs) Are the Most Powerful Retirement Account in America

Ever sit down to do your taxes and wish you knew about the crazy loopholes megatrillionaires use to pay $0 in taxes? You’re in luck: there’s a legal loophole in the United States tax code that allows regular Americans like you and me to set aside thousands of dollars in income and never have to pay a dime in taxes. It’s called the Health Savings Account (or HSA).

What is an HSA?

Health Savings Accounts were created by the U.S. Congress to help Americans save for medical expenses. They’re a special savings account available to people who are enrolled in high deductible health plans (HDHPs), but unfortunately they’re not allowed for people who don’t have HDHP insurance plans. For 2016 you can save up to $3,350 in your HSA as an individual, or up to $6,750 in your account as a family. So how can you use yours to take advantage of the tax code like some fancypants CEO? Great question!

They are the only way to get truly tax free money

The government likes to incentivize its citizens to save for retirement. They usually do this by providing you tax incentives to invest in your retirement. A workplace 401k reduces your taxable income and can grow tax free, called a “double tax advantage” (reducing your taxes on the way into the account and not costing you any taxes while growing in your account). A Roth IRA grows tax free and is tax free when you take money out of it (a double tax advantage by growing tax free and not costing you taxes when you withdraw the income). But the HSA is the only savings vehicle that offers a triple tax advantage and is 100% tax free. Read that again: your Health Savings Account is the only account you can use to save for retirement without ever paying taxes.

How does that work? The government allows you to put away non-taxed dollars into your HSA, lowering your tax rate. For example, if you earn $45,000 but you put $5,000 into your HSA, the government believes you have earned only $40,000 and taxes you on that amount. At a 25% tax bracket that means that $5,000 you invested saves you $1,250 in taxes. Then, when you invest your HSA the government allows the earnings to grow without paying taxes. Finally, when you withdraw money from your HSA and use it to pay for qualified healthcare expenses you don’t pay taxes either. That’s a triple tax advantage, more powerful than your 401k, Roth IRA, traditional IRA, 529, 403b…it’s literally the only way you can ever get tax free money away from the government!

They work like a regular 401k too

What if you reach retirement age and find yourself just unable to fall ill? Congrats on winning the genetic lottery, but the HSA is still a great bet for you for retirement. Why? Because once you reach the age of 65 you can use your HSA as regular income. Spend it on whatever you like, and the government will simply ask that you pay your regular level of income taxes. That’s exactly the same as a traditional IRA or 401k meaning in a worst case scenario your HSA is simply a traditional retirement account with possible upside.

There’s no “use it or lose it” clause

Many of us have had healthcare plans that offered a Flexible Spending Account (FSA). Those accounts allow you to set aside some money tax-free and use it to pay for healthcare expenses. But at the end of the year any money you didn’t spend was lost for good; if you didn’t “use it,” then you would inevitably “lose it.” A Health Savings Account (HSA) doesn’t have this clause. The money you put into your account, up to $3,350 for an individual or $6,750 for a family in 2016, belongs to you whether you spend it all in a year or not. And if your HSA is offered through your place of employment the funds follow you when you leave that job. With a Health Savings Account you can save for medical costs through the years rather than trying to guess how much you need and being out money if you guess wrong with your FSA.

They let you play “catch up”

Like a few other retirement accounts, your HSA allows you to make “catch up” contributions as you get older and meet certain requirements. For 2016 if you’re at least 55 years of age you can put an additional $1,000 into your Health Savings Account investments regardless of whether you’re on an individual or family insurance plan. Instead of contributing $3,350 as an individual you can set aside $4,450, or for a family you get to save up to $7,750 instead of $6,750. That means socking away more precious retirement funds at the stage in your life when you’re closest to retirement.

You pick what you invest in

Many workplace health savings accounts offer more investment options than traditional 401k retirement plans. More options means greater control over your money and greater control over your money means being empowered to grow that money faster. In short, the Health Savings Account is the most powerful tax protected account available to the average American tax payer.

You can reimburse yourself

To maximize your Health Savings Account benefits it’s best to pay your medical expenses out of pocket if you can afford to do so. “But Bill,” I hear you asking, “isn’t the point of my HSA to pay my medical expenses?” Yes, but the power of compound interest means that if you can afford to pay out of pocket you can use your HSA money to grow in an investment account while you pay for health out of your income. You’ll have more money from the growth on those investments down the road, plus you can reimburse yourself for the medical expenses you pay in the meanwhile! You can take receipts from qualified medical expenses and use your HSA to reimburse yourself later, all tax free! Looking to retire early? This could be the perfect strategy for getting access to tax-free dollars from retirement accounts without paying any penalties.

The Health Savings Account is one of the newest tax-advantaged retirement accounts available to American taxpayers. The triple tax advantage makes it one-of-a-kind, and the features here are why the HSA is the most powerful retirement account available to you and me. If you have access to one don’t pass on the opportunity to benefit from the type of tax advantage usually reserved for the 1%.