Retirement Savings: 6 Ways an HSA Could Be More Beneficial Than a 401(k) or IRA

Figuring out what sort of investment accounts to save in for retirement can be a little puzzling. Most financial experts will recommend tax-advantaged accounts like 401(k)s and traditional IRAs, where you get the tax benefit on pre-tax contributions; as well as Roth IRAs, in which you only pay taxes on the earnings, not on withdrawals. However, there’s yet another type of account to consider: the health savings account (HSA).

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While HSAs do have limits and requirements, they are unique accounts that have some benefits your traditional retirement accounts do not.

It’s savvy to have a mix of retirement account types, but here are some of the advantages an HSA has over other retirement accounts .

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Triple Tax Advantage

Angelo Crocco, CPA and owner of AC Accounting , echoed the common wisdom of HSAs, which is their “triple tax advantage.” You can receive tax-free growth, tax-deductible donations and tax-free withdrawals for approved medical costs when you have an HSA,” he said. “I urge retirees to take advantage of this three-pronged approach, particularly since healthcare expenditures can pile up throughout retirement.”

The noteworthy detail here is that these accounts are specifically designed to help with healthcare costs, and you must have a high-deductible health plan in order to qualify for one. In this day and age of high insurance costs, that’s not hard to achieve.

In comparison, Crocco said, conventional IRAs only permit tax-deferred growth. “[W]hich means that you will eventually have to pay taxes on the withdrawals. Retirees can manage their healthcare bills more effectively and keep their IRA cash for other purposes by using an HSA.”

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No Required Minimum Distributions (RMDs)

Another often-overlooked advantage is that HSAs do not require you to take required minimum distributions (RMDs), Crocco said.

Unlike traditional IRAs, which require you to start taking withdrawals at age 72, HSAs give you the freedom to let your money grow without any pressure.

“I’ve seen how this flexibility can empower retirees to make more strategic decisions about when to use their HSA funds, allowing them to keep their IRAs intact for longer,” Crocco said.

Adaptable Legacy Planning and Long-Term Care

Another way that HSAs are unique is that they can be helpful in long-term care planning by being used to cover the high premiums associated with long-term care insurance.

“A significant benefit is that if your spouse inherits your HSA, they will be able to use the funds tax-free. Even though IRAs are transferable, their frequently intricate tax regulations may make things more difficult for your beneficiaries,” Crocco said. “Having the peace of mind that your HSA can benefit your loved ones is something I always emphasize to my clients.”

Tax-Free Investment Growth Tied To Medical Inflation

One of the least-discussed benefits of an HSA is the potential for tax-free investment growth that can outpace medical inflation, according to Ali Zane, CEO of Imax Credit .

“If you max out contributions, you can invest a portion of your HSA balance into stocks, bonds or mutual funds,” Zane said. “This lets your money grow tax-free while anticipating rising healthcare costs, a massive benefit compared to the tax-deferred growth of a 401(k) or IRA, which will be taxed upon withdrawal.”

Reimburse Yourself for Medical Expenses

Another “hidden gem” in HSA plans is that you don’t need to use your HSA funds immediately for medical expenses, Zane said.

“You can pay out of pocket for medical bills today, let your HSA investments grow and then reimburse yourself years later, all tax-free. This creates a self-funded healthcare cushion, unlike anything a 401(k) or IRA offers.”

The only requirement to be eligible for this reimbursement is that your medical expense must be incurred after you opened the HSA.

Non-Medical Withdrawals After Age 65

The last benefit that’s unique to an HSA, according to Kevin Shahnazari, founder of FinlyWealth , is that after age 65,  HSA funds can be withdrawn for non-medical expenses — though they’re taxed as income like traditional IRA withdrawals.

“This makes HSAs function as backup retirement accounts. HSAs offer investment options similar to IRAs, allowing for long-term growth potential,” Shahnazari explained.

While it’s not likely that you can only use an HSA as a retirement strategy, it’s an excellent type of account if you anticipate significant healthcare needs and will have a high-deductible health plan.

This article originally appeared on GOBankingRates.com : Retirement Savings: 6 Ways an HSA Could Be More Beneficial Than a 401(k) or IRA