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Tax-free growth with an HSA

Updated: Oct 24, 2023

When most of us think of retirement planning we think about our 401(k)s or IRAs. We don’t typically think about a Health Savings Account as a retirement vehicle, but it can be.


Traditionally the HSA is a way to pay tax-free for healthcare expenses. While this is a good way to use the funds, for younger investors I look at the HSA differently–they’re like a super charged Roth IRA.


Here’s why:


Triple Tax Advantages

  1. Contributions are tax-deductible

  2. Earnings and dividends in the account are not subject to tax each year

  3. Withdrawals are tax-free if they’re spent on qualified medical expenses

    1. The list of eligible expenses is vast (like Medicare Part B premiums) and it’s likely all of us will have medical expenses as we age.


The HSA is the only account that offers triple tax-advantages.



Long-term investment possibility


HSAs are not use-it-or-lose-it accounts like a Flexible Spending Account (FSA).


Both accounts offer a way to pay for healthcare expenses tax-free. FSAs must be spent each year or you forfeit the money (there are some carry-over provisions now, but you still have to spend the majority of the balance each year). HSAs don’t have to be spent, you can leave the balance to grow.


You can buy stocks, bonds, mutual funds, ETFs, etc. in your HSA. You can invest as aggressively or conservatively as you want.


  • If you’re young and want to use it as a retirement vehicle–invest aggressively to maximize potential tax-free growth.

  • If you’re a retiree with medical expenses–invest conservatively with more cash/bondsto reduce swings in value.

The combination of being able to invest the funds and not having to spend them each year is how they act as a retirement vehicle for me. Instead of using my HSA to pay for health expenses now I pay out of pocket, which allows me to keep my HSA money invested and growing tax-free.



Ok they sound great, what’s the catch with HSAs?


You have to be covered by a high-deductible health plan (HDHP) to be eligible. What is a HDHP?


Now not everyone should use a high-deductible health plan. If you expect to have health expenses then you would elect a lower deductible plan so insurance coverage kicks in faster.


A high deductible plan should only be used if you expect to have minimal health expenses that year. Because if you do have medical bills you’ll end up paying more out of your pocket before you meet your deductible and insurance coverage kicks in.


For example: if you had young children at home and know you’ll be at the doctor a good bit then you probably shouldn’t elect a high-deductible plan.



HSAs aren’t right for everybody, but as you plan for your future consider the benefits of incorporating an HSA into your savings strategy.




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