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I really don't like the idea of retiring on Social Security alone -- especially with the average retiree today collecting just $1,917 a month. That's why I'm doing my part to save for retirement as best as I can.
But it's not enough to just set some money aside for retirement each month and give yourself a pat on the back. It's also important to find the right home for your long-term savings.
Read more: unlock best-in-class perks with one of these brokerage accounts
You have multiple options. If your employer offers a 401(k), you could sign up for it and have contributions deducted from your paychecks. If you don't have access to a 401(k), an IRA is another good choice. Anyone with earned income can contribute to one.
But if there's one retirement account I think it's worth paying attention to, it's a health savings account, or HSA. While HSAs are technically meant to be used for medical spending, they can double as a retirement account easily. And you may want to open one for the massive tax savings involved.
Why HSAs can't be beat
With a traditional IRA or 401(k), your contributions are made on a pre-tax basis. This means that you exempt a portion of your income from taxes. Investment gains in an IRA or 401(k) are also tax-deferred until retirement, so you don't pay taxes on gains year to year. You only pay them when you take withdrawals from your account.
Roth IRAs and 401(k)s work differently. With Roth accounts, contributions are not tax-free. But investment gains are tax-free, and so are withdrawals.
But HSAs offer all of the benefits of traditional and Roth plans in one. With an HSA:
- Your contributions go in tax-free
- Your investment gains are tax-free
- Your withdrawals are tax-free when used for medical spending
Here's how HSAs work: You put money into your account on a pre-tax basis up to an annual limit that changes each year. From there, you can withdraw your money at any time to pay for qualified healthcare expenses, such as copays to see the doctor, prescription eyeglasses, or medication.
But you don't have to withdraw your money. You can carry an HSA balance forward as long as you want to. And I'd argue that it pays to carry your balance into retirement.
That way, you can invest the money you don't use right away and grow it into a larger sum. You can then set yourself up with a pile of cash for medical spending in retirement, which is super helpful since many people's healthcare costs increase when they're older.
You should also know that if you withdraw from an HSA for a non-medical expense before age 65, you face a penalty. But come age 65, that penalty is waived. At that point, your HSA basically turns into a traditional IRA or 401(k). You'll pay taxes on non-medical withdrawals, but you can spend that money on any expense you choose.
Do you qualify for an HSA?
Hopefully by now I've convinced you to start contributing to an HSA if you're eligible. But are you eligible? It depends on your health plan.
To qualify in 2024, you need an insurance policy with a minimum deductible of $1,600 for individual coverage or $3,200 for family coverage. Your plan's out-of-pocket maximum also cannot exceed $8,050 for individual coverage or $16,100 for family coverage.
If you're not able to contribute to an HSA this year, don't write off the idea forever. It's a good idea to check the details of your health coverage each year to see if you're eligible based on changes to your insurance or to HSA requirements. But if you are eligible, this is one retirement savings plan you definitely don't want to pass up.
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