HSA – The Retirement Account In Disguise

retirement account in disguise

Soon enough, it will be that time of the year again.  No, I am not talking about Christmas.  The jolly “old” man will be headed our way soon enough in a few months from now.

Until then, most employers will enter into “open enrollment period”.  And us employees will have the change to either re-confirm or change our insurance plan and benefits.

So this is the perfect time to talk about THE retirement account in disguise!  One I just recently learned about and have been taking advantage of this year.

The HSA or Health Savings Account

The HSA is a tax-advantaged health savings account available to employees enrolled in a high-deductible, low-cost health insurance plan.

Since high-deductible plans come with more out-of-pocket expenses, the government provides this tax incentive in hopes of people preparing just in case.

You can think of this type of tax incentive just like you would think of your 401k.  Dollars are contributed pre-tax and, at the end of the year, your taxable income is lower!

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So why a Retirement Account in Disguise?

retirement account in disguise illustration

If you are enrolled in a high deductible, low-cost health plan and don’t expect to have a large number of medical bills, the HSA can turn from a medical savings account into a special retirement account.

An HSA account, being the retirement account in disguise it is, can combine the benefits of both a Traditional IRA and Roth IRA.  Does this sound too good to be true?  It is truly the best of it all!

Just like with a traditional IRA, you will be able to contribute pre-tax dollars and reduce your taxable income.  Just like with a Roth IRA, your earnings will grow tax-free.

And as long as you withdraw money for past, current, or future medical expenses (save your receipts!), starting at age 65 you can withdraw your contributions tax-free as well.  Win Win Win!!!

Never Pay Taxes … How?

For once, the IRS has not imposed a slew of rules and regulations on something.  Mainly, I believe, because the HSA is supposed to function as a health care tool vs. a retirement vehicle.

There are no rules stating that your HSA funds must be used within a certain amount of time.  As long as you withdraw the funds (whenever!) for qualified medical expenses, you’ve fulfilled the one requirement.

$30k worth of magic via this retirement account in disguise

retirement account in disguise table

The truth is always in the numbers.  Let’s take the following as an example.  A 35-year-old employee elects a high-deductible, low-cost plan for one year only.  And also maxes out the limit of $3,400.

Within a time frame of 30 years, he/she can withdraw all contributions and investment gains tax-free for qualified medical expenses.  This could be expenses incurred over the past 30 years, as long as you’ve held onto the receipts!

An HSA is for you, IF …

If you only spend a few hundred dollars per year on medical expenses, it makes no sense to pay a ton of cash every month for a low deductible, high-cost health insurance plan.

Instead, a high deductible, low-cost health insurance plan in tandem with an HSA could possibly a better choice.  You could stash away another $3,400 (individual) / $6,750 (family) per year and lower your taxable income.

The few hundred dollars you do spend on healthcare per year you could handle two ways.  You could pay out of pocket and save your receipts for reimbursement down the road.  Or withdraw from your HSA and save the remainder for future years.

An HSA is NOT for you, IF …

If you spend thousands of dollars per year on medical expenses, it might make more sense for you to maintain a low-deductible, high premium health plan.  Especially if the $3,400 HSA wouldn’t cover your out of pocket expenses if need be.

Same goes for anticipated medical expenses.  Not all medical scenarios happen out of the blue.  Some can be foreseen and planned.  Such as in case of pregnancies or anticipated medical intervention. In which case a low deductible plan might be advisable.

What if I don’t get sick?

Now, of course, there is the possibility that you are not going to fall ill and won’t need this extra cash.  What now?  Will you lose your money?  Will it just sit in the HSA account forever?  No and No!

If you are lucky enough to not have the medical bills to deplete your $30,000 worth of HSA funds, you can cash them out by paying income tax on them.  And hopefully you will fall into a lower tax bracket than you would have during your working life.


Either way you slice it, an HSA is a great opportunity to put away more cash for retirement.  On top of the $18,000 stashed away every year in your 401(k) and $5,500 in your Roth IRA.

No matter if you cash out tax-free for medical expenses or at a (hopefully) low tax %, it is an excellent way to prepare for retirement even further.

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8 thoughts on “HSA – The Retirement Account In Disguise

  1. FM: great to see you talking about HSAs! One of my favorite benefits and retirement saving tools.

    It may not be obvious to everyone but typically the pretax deductions your employer charges for an HSA-compatible plan are lower than those for a PPO or HMO option (if you are even still given the choice by your employer). If you funnel those savings into your HSA, you are really not losing anything if you stay healthy and keep your expenses low.

    The other point is that if you are simply going for your annual checkup or to get vaccines, flu shots, what have you – those are covered 100% due to ACA laws governing Preventive Care so even on a high deductible plan – you can sometimes go years without having any out of pocket costs unless you do get sick of course.

    Nice summary. The 2018 contribution limits are available now as well.

    • Financial Muse says:

      Great additional points, Mrs. Need2Save. Especially preventative care being covered at 100%!!! If someone goes to the Doctor for preventative care only for years on end, an HSA is absolutely the way to go.

  2. An HSA can be a powerful component of a retirement strategy! We leverage one here for our family. We haven’t touched it through – instead we’re letting it grow and we pay cash for medical expenses in the short term. Of course we keep all receipts to make it easy to get our money out later. 🙂

    • Financial Muse says:

      I’d say, make sure a high deductible health plan is the right choice for you. If these emergencies were one timers, keep at it and invest this year. Life happens!

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