A health savings account (HSA) can help you save for medical expenses while you enjoy some tax benefits, too. While an HSA isn't specifically designed to be a retirement savings vehicle, it can do double-duty as one if you need an additional source of income.

If you're interested in using an HSA to fund retirement expenses, there are a few tax rules to know.

Using an HSA to Fund Retirement

As the name implies, a health savings account's primary purpose is to fund health care costs. However, it's possible to use the money you save for other expenses in retirement should you remain healthy or become able to cover health care expenses with Medicare or private insurance.

Some o💧f the expenses you might pay in retirement using HSA funds include:

• Housing costs, including mortgage or rent payments and utilities
• Day-to-day living expenses, such as food and transportation costs
• Debt repayment for 澳洲幸运5开奖号码历史查询:credit cards, 澳洲幸运5开奖号码历史查询:student loans, or other debts
• Higher education expenses for a grandchild
• Travel expenses

You may also use 澳洲幸运5开奖号码历史查询:health savings account (HSA) funds to cover less common scenarios in retirement. For example, say that your adult child passes away and the care of their 10-year-old child is entrusted to you. You may tap into your HSA to help pay for their medical care if you're able to claim them as a 澳洲幸运5开奖号码历史查询:dependent on your tax return.

Tax Implications of Using an HSA for Retirement

Technically, there is no rule barring you from withdrawing money from a health savings accou𒉰nt for non🏅-medical expenses. There are, however, some tax rules to know about doing so.

If you're unsure about how HSA tax rules work, here's a refresher.

• Contributions to an HSA are tax-deductible, even if you don't itemize your taxes.
• Your account balance grows on a 澳洲幸运5开奖号码历史查询:tax-deferred basis.
• Qualified withdrawals, meaning withdrawals for eligible medical expenses, are tax-free.

Contributions to an HSA can be made via payroll deductions, or from your own funds if you're 澳洲幸运5开奖号码历史查询:self-employed. Employers can also make matchin☂g contributions to an HSA🦋.

Now, what about using HSA money to pay for e𝄹xpenses other than health care? In that instance, there are two guidelines to be aware of:

• Withdrawals made prior to age 65 for anything other than eligible medical expenses are subject to a 20% tax penalty, and regular income tax.
• Once you turn 65, you can take money from an HSA without the 20% penalty for any reason, but you'll still pay ordinary 澳洲幸运5开奖号码历史查询:income tax on those 澳洲幸运5开奖号码历史查询:distributions.

For those reasons, it's important to consider whether taking money from an HSA to fund retirement expenses other than medical care makes sense.

If you can wait until you're at least 65 to make non-qualified withdrawals, you can avoid the 20% tax penalty. However, you'll still owe income tax on any funds you withdraw, which negates some of the benefits of saving in an HSA to begin with.

Tips for Using an HSA for Retirement

If you have the option to save money in an HSA, it's helpful to know how to incorporate it into your retirement plans. These tips can help you make the most of your health savings account during your working years and beyond.

Max Out Contributions by Age 65

HSA contributions are tax-deductible until you enroll in Medicare. Enrollment for Medicare begins at age 65, which may allow you plenty of time to max out annual HSA contributions, depending on your current age.

How much can you save in an HSA? The contribution limits are adjusted annually for 澳洲幸运5开奖号码历史查询:inflation. In 2024, the limits are $4,150 for individuals and $8,300 for families. The 2023 contribution limits were $3,850 for indiꦬviduals and $7,750 for families. These limits 🎐include employer contributions.

"Maxing out contributions before age 65 allows you to save for general retirement expenses beyond medical expenses," said Mark Hebner, founder and president of Index Fund Advisors Inc. in Irvine, California, and author of Index Funds: The 12-Step Recovery Program for Active Investors. "Although you will not receive the tax exemption," Hebner added. "It gives retirees more access to more resources to fund general living expenses."

Don't Spend Your Contributions

The triple tax advantages afforded by an HSA mean that the best way to use it is to treat it as an investment tool for retirement. Holding off on spending down your HSA contributions during your working years can give you a bigger sum to work with when it's time to retire.

If you absolutely must spend some of your contributions before retirement, be sure to spend them on qualified medical expenses to avoid tax consequences. Again, if you spend the money on anything else before you’re 65, you will pay a 20% penalty as well as the income tax on the withdrawals. 

Invest Your Contributions Wisely

Your investment strategy for an HSA should be similar to the one you’re using for your other retirement assets, such as a 401(k) plan or an IRA. When deciding how to invest your HSA assets, make sure to consider your portfolio as a whole so your overall 澳洲幸运5开奖号码历史查询:diversification strategy and 澳洲幸运5开奖号码历史查询:risk profile are where you want them to be.

Your employer might make it easy for you to open an HSA with a particular administrator, but the choice of💮 where to put your money is yours. An HSA is not as restrictive as a 401(k). It’s more like an IRA.

Since some administrators only let you put your money in a savings account, where you’ll barely earn any interest, make sure to 澳洲幸运5开奖号码历史查询:shop around for a plan witﷺh high-quality, low-cost investment options, such as Vanguard or Fidelity funds. 

Pay Health Care Expenses First

The best use for HSA funds in retirement is health care expenses, since qualified withdrawals are tax-free. Qualified payments for which tax-free HSA withdrawals can be made include:

• Office-visit copayments
• Health insurance deductibles
• Dental expenses
• Vision care (eye exams and eyeglasses)
• Prescription drugs and insulin
• Medicare premiums
• A portion of the premiums for a tax-qualified 澳洲幸运5开奖号码历史查询:long-term care insurance policy
• Hearing aids
• Hospital and physical therapy bills
• Wheelchairs and walkers
• X-rays

You can also use your HSA balance to pay for in-home nursing care, 澳洲幸运5开奖号码历史查询:retirement community fees for lifetime care, long-term care services, nursing home fees, and meals and lodging that are necessary while obtaining medical care away from home. You can even use your HSA for modifications, such as ramps, grab bars, and handrails, that make your home easier to use as you age.

One strategy might be to group qualified medical costs into a single year and♊ tap the HSA for tax-free funds to pay them, compared with withdrawing from other retirement accou🔥nts that would trigger taxable income.

“Using HSA money to pay for medical expenses and long-term care insurance in retirement is a great benefit for investors given the tax exemption on any withdrawals made to fund either," Hebner said. "In other words, it’s the most cost-effective way to fund those expenses because they provide investors the highest after-tax value." 

Also, note that there are limitations on how much you can pay ♔tax-free for long-term care insurance based on your age.

Reimburse Yourself for Medical Expenses

With an HSA, you are not required to take a distribution to reimburse yourself in the same year you incur a particular medical expense. The key limitation is that you can’t use an HSA balance to reimburse yourself for medical expenses you incurred beforeཧ you established the account.

So澳洲幸运5开奖号码历史查询: keep your receipts for all healthcare expenses you pay out of pocket after you establish your HSA. If, in your later years, you find yourself with more money in your HSA than you know what to do with, you can use your HSA balance to reimburse yourself for those earlier expenses.

Choose a Beneficiary

When you open your HSA, you will be asked to designate a 澳洲幸运5开奖号码历史查询:beneficiary for your funds upon your death. If you're married, the best person to choose is your spouse, because they can inherit the balance tax-free. (As with any investment with a beneficiary, however, you should revisit your designations from time to time because death, divorce, or othꦫer life chaܫnges may alter your choices.) 

Anyone else you leave your HSA to will be subject to tax on the plan’s 澳洲幸运5开奖号码历史查询:fair market value when they inherit it. Your plan administrator will have a designation-of-beneficiary form you can fill out to formalize your choice.

The Bottom Line

A health savings account, available to consumers who choose a high-deductible health plan, ha𝓀s been largely overlooked as an investment tool. With its triple tax advantage, however, it provides an excellent way to save, invest, and♑ take distributions without paying taxes.

The next time you’re 澳洲幸运5开奖号码历史查询:choosing a health insurance plan, take a closer look at whether a high-dedu🐟ctible health plan might work fo𒁃r you. If so, open an HSA and start contributing as soon as you’re eligible.