Despite being around for 10 years, HSAs are not commonly used as a method of saving for retirement even though they have incredible tax benefits. Not only do contributions reduce taxable income and earnings do not incur taxes, but qualified distributions are also not taxed. A recent article by Paul Fronstin in “Notes” highlighted not only these benefits, but how you can use your HSA to save up an incredible amount of money for your retirement. The most striking part of the article explains how, under the right circumstances, you could end up with a million dollar HSA by the age of 65. Believe it or not, this is NOT completely unrealistic. If you start contributing to an individual HSA at the age of 25 and make the maximum contribution each year, projecting the increase in contribution limits over time, with proper investing, your HSA could be worth $1.1 million and you could save up to $420,000 in federal income taxes.
It is important to understand not only the advantages to an HSA but also its limitations. Keep in mind, you only qualify to contribute to an HSA if you are currently enrolled in a high deductible health plan and you do not benefit from an additional health plan that is not HSA-eligible. If you enroll in Medicare, you can no longer contribute to an HSA. It is also important to consider that if you take a non-qualified distribution (one not to pay for qualified medical expenses), the distribution is not only taxed, but also is subject to a 20% penalty.
You CAN, however, always withdraw from an HSA even if you don’t qualify to contribute to one, meaning that if your health care plan changes, you do not need to close your HSA account. You can also continue to contribute to an HSA no matter what age you are, and you are never required to take required minimum distributions. There are no income restrictions preventing you from opening an HSA, and you can contribute even if you are not drawing a salary. You may also take a distribution regardless of your age as long as it is to pay for a qualified medical expense. All these attributes make the HSA a unique retirement savings tool, because though it is very different from other retirement accounts in terms of age restrictions and distributions, it follows the same rules as more common retirement accounts when it comes to investing.
The $1.1 million HSA calculation was based on high yield investments (about 7.5%). As many of you know, this is an unusually high return to find in traditional investments such as stocks and mutual funds, especially when taken over 30+ years. This is where self directed assets can give you the edge. There are people investing their retirement accounts AND HSAs in real estate, promissory notes, gold, and other non-traditional assets. If you have a traditional retirement account that doesn’t quite have enough money to buy that investment property you have your eye on, you can partner it with the funds in your HSA! Make your retirement money go further and use your HSA to its best advantage.