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Small Business Employee Benefits and HR Blog

How to use an HSA as a retirement account

We've mentioned before that HSAs can act as "IRAs on steroids" because the tax benefits with an HSA are better than IRAs (roth or traditional).  What we haven't explained is how to actually get money out of an HSA when you need it.
You can only take money out of one to reimburse you for a qualified medical expense.  The idea is that you put money into an HSA tax-free and then pay yourself back with that money to cover expenses under your deductible.  It's easy to instead get the money out years from now when you're ready to retire.

The important thing you need to know is that there is no requirement specifying when you need to take money out of an HSA to pay for medical expenses.  Because of this, you can save up receipts from normal purchases you make now (prescription medicine, band-aids, doctor/dentist visits, etc) and use them to make withdrawals from the HSA whenever you actually need the money.

By doing this you let the money in your HSA accrue interest tax-free until you're older and want to start putting that money to good use.  In this way, an HSA is a more effective retirement savings tool than an IRA.

If you're not quite sure how this works, I'll walk through an example.  Let's start by assuming that I contribute $500/year to an HSA.  Each year, I spend money on doctor visits, medicine, and various other medical expenses.  Each time I spend money on something medical-related, I save that receipt for later.

When it comes time for me to retire, my HSA has grown significantly because I didn't pay income tax on my contributions and I wasn't taxed on the interest (or investment returns).  I also won't be taxed when I withdraw the money.  Because I have decades of medical receipts saved up, I can effectively take money out whenever I want by "reimbursing" myself for things I bought decades earlier.
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