When you think of retirement savings accounts, chances are good the first ones that come to mind are 401(k)s and IRAs. And while these retirement plans have their place in saving for your later years, there's another type of account you also need to consider. It's called a Health Savings Account (HSA).
HSAs are a tax-advantaged account you're allowed to invest in if you have a qualifying high-deductible health plan. If you're eligible for an HSA, there are two really big reasons why at least some of your retirement nest egg should be invested in it.
1. HSAs offer unique tax advantages
Health savings accounts boast tax advantages that are better than any other type of retirement investment account.
1. You can make tax-free HSA contributions up to annual contribution limits. This means your taxable income will be reduced by the amount you invest so each contribution won't cost as much.
2. You can grow your money tax-free. You don't have to use the money you invest in your HSA each year in order to avoid losing it. You can leave it invested for as long as you want and won't pay taxes on gains you make.
3. You can make tax-free withdrawals. If you take money out for qualifying healthcare expenses, you aren't taxed on the distribution.
By contrast, traditional and Roth accounts either offer tax-free contributions or tax-free withdrawals -- but not both.
Of course, you may be wondering what happens if you don't take money out for qualifying health expenses. As long as you're age 65 or older, you won't be penalized on the withdrawal. You'll be taxed at your ordinary rate, though. In other words, the account will basically be taxed in a similar way to a 401(k).
2. Healthcare is one of the biggest expenses seniors face
There's another really good reason to invest in an HSA for your senior years. There's a very good chance you'll end up needing a lot of cash to cover medical services, and an HSA can provide it.
A recent Fidelity study revealed an opposite-gender senior couple retiring this year at age 65 would spend around $300,000 on medical expenses over the course of their retirement. This is spending for things like prescription drug costs and Medicare premiums.
It could be a struggle to come up with enough money for all the care you need. But, if you've spent your career investing in an HSA during years when you were eligible, you should have a large pot of cash set aside that's earmarked for medical purposes. This can ensure you can afford the care you need without draining your nest egg dry.
Because of these huge benefits of using an HSA to save for retirement, any worker with access to this type of account should aim to max out contributions during the years when they are eligible -- and should try to leave the money alone to grow until they reach their retirement years when the funds could provide the financial security they deserve.