An HSA, or Health Savings Account, is a great way to pay medical expenses on a pre-tax basis. But how can we say it’s a retirement savings plan? The only thing you can do with it is pay medical bills. It turns out that with the right strategy, you can pay for anything you want with an HSA.

Well, look who’s back, if it isn’t Tommy Two Toes. Guess you couldn’t stay away.

Yeah, whatever, the wife says I should come.

Oh, your wife is calling the shots now. Interesting.

She don’t call nothing, ‘cept maybe an ambulance for you if you don’t watch your mouth. What are you flapping your gums about today?

HSAs – Health Savings Accounts.

Yeah, I know what that is, you don’t gotta spell it out for me.

Right, well, if you’ll have a seat we can get started.

We’ve all been told to max out our employer-sponsored plans like 401(k)s because the employer match is free money. But in terms of tax treatment, 401(k)s are not all that great. Granted, you don’t have to pay tax on the money when you put it in, but in retirement when you take distributions you get taxed on both your original investment and accumulated investment earnings.

Boring.

Hang on, it gets better.

As pointed out in The Wonder of a Roth IRA, a Roth account is a step up from a 401(k). The primary advantage of a Roth is you don’t have to pay tax on investment earnings like you do with a traditional 401(k). A Roth works essentially like a 401(k) in reverse: you pay tax on the money when you put it in, but in retirement when you take money out it’s tax-free.

As good as a Roth is, an HSA is even better. An HSA is the best retirement savings plan you can have. With the right strategy, you can use it for whatever you want.

You sure about that? It says right here 'HSAs are only good for medical expenses.' Don’t you research this stuff? I googled it in like two seconds!

Yes, you are right, the funds in an HSA can only be used to pay eligible medical expenses. But there’s a loophole: the regulations do not specify when the medical expense has to occur. You can use your HSA to pay medical expenses that have occurred in the past.

Big deal, what good does that do me when I'm retired? How am I paying my other bills? You’re not making any sense, I think maybe I gotta be someplace else.

Hold on, I’m not finished. I am going somewhere with this.

You better get there in a hurry because I haven’t got all day.

Here it is: the regulations allow you to use an HSA to pay medical expenses that occur at any time in the past.

I swear, if you don’t say something that makes sense in the next—

People are using their HSAs to save for retirement. They keep their medical receipts the whole time they have the HSA, then when they reach retirement, they cash them in. By justifying the withdrawals with old medical bills, they can use the money for whatever they want. 

Okay, I got a question: before I’m retired, how am I paying my medical bills?

Out of pocket.

I thought that’s what the HSA was for.

It is, but with this strategy you are using your HSA for retirement savings rather than the way it was intended.

So you’re saying I get an HSA, but instead of using it to pay medical bills when they happen, I pay out of pocket and keep the receipts. Then when I retire, I use all them receipts to get my money back.

Exactly.

EGGSTACK RETIREMENT PLANNER

That’s a lot of paperwork, and for what?

The for what is the trifecta of tax-free savings! You don’t pay any tax on the money you put into an HSA, you don’t pay any tax on the money you take out, and you don't pay any tax on your investment earnings. It’s totally tax-free – coming, growing, and going. It doesn’t get any better than that!

Pretty slick. So…?

So what?

We gotta keep this on the down-low or what? No way this is legal.

It’s perfectly legal and people do it all of the time.

No taxes ever. How come I’m hearing about this now?

You need to come more often. We cover all sorts of topics designed to help with retirement planning.

How much we talking here, I can put in whatever I want?

No, there are limits.

Figures.

For singles the annual cap is $3,600, and for married couples it’s $7,200.

Seven large a year. What if we don’t got enough medical bills to cover that? I mean, you’re socking away seven grand a year, it’s gonna add up.

Yes, it does. In addition to the medical receipts you’ve saved, you will have medical expenses in retirement which will count toward the withdrawals. But don’t worry, if you don’t have enough medical receipts to cover it, you won’t lose any money. As long as you are 65 or older, you can withdraw as much as you like without any medical justification. You’ll just have to pay taxes on it, just like you would with a 401(k).

I got another question: my 401(k) is in stocks. These HSA’s, they’re like in a savings account or something. How am I making any money on that?

You can invest your HSA in anything you like: stocks, bonds, mutual funds – anything.

What kinda medical bills we talking here? The wife wants to get them things they put on your teeth…vanities or something. We’re talkin’ serious bank.

You mean veneers?

Yeah, whatever.

No, that wouldn’t be an eligible medical expense; nothing cosmetic. But hospital stays, doctor visits, prescription medications, insurance copays, and some elective procedures are eligible. Psychiatric care is also eligible.

You saying I’m crazy?

No, no, I—

I’m telling you, you're getting on my last nerve. That don't end well, ask Freddy Face Plant.

Freddy Face Plant?

Yeah, they call him that on account of him gettin’ sideways with me.

Uh . . .

Let’s wrap this up, what else you got there bean-boy?

To open an HSA, you have to be covered by a high-deductable healthcare plan. You can’t have any other form of medical insurance, you can’t have a flexible spending account, and you can’t have a health reimbursement account. Any withdrawals made for non-medical reasons prior to the age of 65 are taxed as ordinary income plus a 20 percent penalty for early withdrawal.

That’s a lot of rules.

It’s worth it for tax-free money.

You know what else is tax-free? This little cooking operation me and a coupla guys got going. You wouldn’t be interested in buying some cold medicine for us would you?

Uh, no, but thanks for asking.

So I should yank my money outta the 401(k) and stick it in the HSA.

No, I wouldn’t do that. An HSA should be one of the ways you save for retirement, not the only way. A good strategy would be to contribute to your 401(k) up to the company match, then max out an HSA. If you still have money left over to invest, you can put it in a Roth IRA.

Sounds like a plan, bean-head. You’re pretty up on all this stuff.

Thanks Tommy, I try.

I’m outta here, the wife’s gonna think I’m some kinda genius when she gets a load of this.

Glad I could help. Come back anytime.

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