How to Turn Your HSA into a Tax-Free Retirement Account

If your company’s healthcare plan is HSA-eligible, drop everything you’re doing and start contributing to it. Yesterday. Do not sleep on the Health Savings Account!
 
Let’s back up, shall we? If you’re like, WTF is an HSA and WHY should I care, allow me to cover the basics.
 
If you have a high-deductible health insurance plan, you’re eligible for a Health Savings Account. The HSA is a tax-free vehicle intended to be used for medical costs. Let’s say you hit up the dermatologist and your health insurance is all, “Deal with your acne yourself!” You can use funds in your HSA to pay for your zit cream.
 
There are some obvious tax benefits to utilizing your HSA, and I've found myself grilling both friends and coworkers about whether or not they're maximizing this hidden gem.

​For one thing, the money you contribute reduces your taxable income. The maximum annual contribution for an individual is $3,600, so if you put $3,600 in your HSA, it reduces your salary (in the eyes of the IRS) by that much. If you’re someone who’s right on the cusp of a higher tax bracket, this might be a good way to skirt the higher tax dig.
 
For example, if you make $40,000, your tax bracket is 22%. If you contribute $3,600 annually to your HSA, the IRS thinks, “Okay, this person makes $36,400,” thereby lowering you to the 12% tax bracket.*
 
*Note that the progressive tax system means your income is divided into brackets and taxed appropriately; being in the 22% bracket doesn’t mean your entire income is taxed at that rate—just the amount that exceeds the previous bracket’s upper limit.
 
Here’s a great graph from NerdWallet that illustrates this principle more clearly:

Moreover, the money you put in goes IN tax-free and comes OUT tax-free (so if you’re like, Hey, I’m going to pay for this zit cream with my money either way, this is a way for you to avoid paying ANY TAXES on that money). The HSA can be used as an investment vehicle—something I’m still digging into and figuring out within my own Optum Bank portal and will follow up on in a future post.
 
But let’s say you’re someone who literally never has health issues. UTIs? Never heard of them. Glasses? 20/20 vision. You’re the walking picture of health.
 
Two things:
 
ONE.
You probably won’t ALWAYS be, so any money you save in this account can be used for medical expenses 30 years down the road because you tweak your back playing with your pet robot (not to be confused with the FSA, which resets every year and is a raw deal, in this expert’s opinion).
 
TWO.
If you retain your invincible status to old age, once you’re 65, the HSA functions as a regular IRA (Individual Retirement Account) and will be taxed in your tax bracket when you take it out (but it went in tax-free and GREW tax-free, which is #YUGE).
 
It’s kind of a win/win.
​
You don’t have to contribute anything crazy—definitely take care of your 401(k) and contribute up to your company match first (and if you’re not doing that, start doing it—last week).
 
But if you’ve got a few extra hundred bucks hanging around each month in your checking account, direct them to your HSA instead so they can grow and help you avoid taxes. Woohoo! #FederalGovernmentWho?

Main Takeaway

The HSA functions as a regular IRA (Individual Retirement Account) post-age 65, so even if you don't use the un-taxed money for medical expenses, it can be withdrawn at your regular tax rate as retirement income.