HSA as a Retirement Account: The Triple Tax Advantage

A health savings account is available alongside an HSA-eligible high-deductible health plan. It is unusual because it can be tax-advantaged at three points: contributions are deductible, growth is untaxed, and withdrawals for qualified medical expenses are untaxed.

A worked example

A hypothetical saver contributes $4,000 a year for 25 years, invests the balance at a 7% annual return, and pays medical bills from cash instead of the account. They are compared with someone who puts the same pre-tax pay into a taxable brokerage account. Assume a 24% income-tax rate and 15% capital gains tax.

After 25 years	Amount
HSA balance	$270,706
Taxable account, after capital gains tax	$186,276
HSA advantage	$84,430

The taxable account starts behind every year, because each $4,000 becomes $3,040 after tax. It then compounds on that smaller amount and pays capital gains tax at the end. The income tax avoided on contributions alone is $24,000.

Model your own contributions with the HSA calculator.

It only works if you leave it invested

The advantage above depends on paying current medical costs from other money and letting the account grow. That is only sensible if you can do so comfortably. Using the HSA rather than carrying a credit card balance is usually the better call.

Keeping receipts helps. Qualified expenses can generally be reimbursed later, which keeps the money available for medical costs while it stays invested. Confirm the current rules and annual limits in IRS Publication 969.

Things to check

• HSA-eligible plan requirements and annual contribution limits, which change each year.
• Whether your state taxes HSA contributions.
• Account and fund fees, which reduce returns over long periods.

Source: IRS Publication 969.