I've never been one to follow the crowd. Nobody would ever peg me as a fair-weather fan and when it comes to trends, I often tow my own line. Charge my Apple watch? No thank you, I'll wind my Longines. I don't mean to imply that everything mainstream or contemporary should be avoided, but sometimes the well-worn trail isn't the only path to a great vista on the mountain, if you get my drift. Therefore, if I stray from the norm in my everyday life, would it not be a safe assumption that I'd also have an uncommon approach to retirement savings? You've assumed correctly...
With the advent of high-deductible health plans (HDHP), employees have noticed a new offering: The Health Savings Account. (HSA) An HSA is available to anyone who is younger than 65 and enrolled in a HDHP, but often employers will offer these accounts as a component of the company's benefits package. Regardless of how one participates in an HSA, using it as a retirement savings vehicle is what makes this approach so unique, because when employed methodically, it can help to combat retirement's arch enemy: health care costs.
The HSA is designed to help individuals and families pay for medical expenses that fall under the account's definition of qualified. Funds in the account grow tax-deferred and, when used for an expense that's deemed to be qualified, are distributed tax-free. It's a great resource for Americans, but much to our chagrin, most people use their HSA inefficiently. To the surprise of many, there's nothing that requires an HSA owner to deplete the account's balance at the end of each year. (contrary to a Flexible Savings Account) When medical expenses are poised to become a significant threat to the financial success of one’s retirement, leaving your HSA to grow can serve as a supplement to other retirement savings.
But you have Traditional and Roth IRAs, along with a retirement plan at work, right? What's the point of yet another retirement savings account?
1) Tax-Deductible Contributions of Up To $6,750 per Year ($1,250 More Than an IRA)
2) Tax-Deferred Growth
3) Tax-Free Distributions for Qualifying Expenses
4) Income Tax Savings, if Funded Through Salary Deferrals
Now, I understand you will probably incur medical expenses that could be paid with qualified distributions from your HSA before you retire. That's almost inevitable, but before you retire, you also have an income. Using disposable income that you have now to pay for current medical expenses will leave the funds in your HSA to grow for future medical expenses, when you've retired. Essentially, you're creating disposable income to pay for medical expenses in retirement that otherwise would not exist.