Health Savings Accounts

How to transform your HSA into the ultimate investment vehicle With a little planning, the triple tax advantages of a Health Savings Account can be put to use for retirement. Health Savings Accounts (HSAs), as the name implies, help people save for medical expenses. —and many can double as triple tax-advantaged investing accounts. Before we walk you through those tax advantages, and the "shoebox" strategy that unlocks them for retirement, here’s an important caveat upfront: You can only contribute to an HSA by meeting a few requirements, namely being enrolled in a high deductible health plan (HDHP). This type of health insurance isn’t for everyone. It comes with the potential for high out-of-pocket medical costs, so it's typically best suited for healthier individuals. But if you find an HDHP makes sense for your situation, consider opening an HSA. Then strap in for some unparalleled tax treatment. How the small-but-mighty HSA holds its own Relative to the 401(k) and IRA, an HSA has modest contribution limits of $4,150 for plans with individual coverage and $8,300 for those with family coverage. That's as of 2024. But those dollars, when invested, pack a much heavier punch. Because while 401(k)s and IRAs come with either tax-deferred contributions or tax-free withdrawals, HSAs offer both. Toss in tax-free growth, and that’s where the “triple” in triple tax-advantaged comes from. Tax-free contributions Tax-free growth Tax-free withdrawals Traditional 401(k)/IRA ✓ ✓ X Roth 401(k)/IRA X ✓ ✓ HSA ✓ ✓ ✓ Don't get us wrong; two tax perks are nothing to sneeze at. In some cases, such as when matching money is on the table, you likely should start filling up your 401(k) first. But an HSA can make for a great addition to your lineup of retirement accounts. Here's how to make it happen. Unboxing the HSA shoebox strategy Once you’re enrolled in an HDHP, you can open an HSA either through your employer or on your own before contributing to it and investing the funds. Similar to 401(k)s, an HSA is yours and stays with you after you leave your job. From there, repurposing its tax advantages for retirement boils down to three simple steps: Step 1: Save your receipts Here’s where the “shoebox” strategy gets its name. A key feature of HSAs is there’s no time limit for getting a qualified medical expense (QME) reimbursed. That’s how a surgery in your 40s can become retirement income in your 60s. Just keep your QME receipts stashed safely in a shoebox, folder, you name it. And bear in mind, any expenses you racked up before you opened an HSA aren’t eligible for reimbursement. Step 2: Do nothing Leave your HSA investments untouched and let compound growth do its thing. Consider paying for routine medical expenses with cash on hand, and building up an emergency fund as a hedge against bad luck and that high deductible you signed up for. Step 3: Come retirement, cash in Years or even decades down the road, when the time comes to start tapping into your HSA for retirement income, simply start cashing in those QME receipts. As we mentioned earlier, there's no time limit for getting reimbursed, so you can wait as long as you want or need before making tax-free withdrawals. You can technically use your HSA penalty-free for anything, no receipts required, after you turn 65. But crucially, those non-QME withdrawals count as taxable income, negating one of your HSA’s three precious tax advantages. See all your retirement accounts—HSA included—side-by-side If or when the time comes for you to set up an HSA, you’ll be ready to make the most of it for retirement. And by connecting your external HSA account to Betterment, you can see it side-by-side with all the other accounts in your retirement goal. It may not add much to your overall balance in the beginning, but with time—and triple the tax advantages—that may change soon enough.

The five types of investing accounts you need to know From 401(k)s to 529s, investment accounts vary in purpose. Learn which are better suited for your long-term financial goals. Investment accounts are valuable tools for reaching your financial goals. But they’re not all the same. You have choices to make, but we’re here to help. Why it matters: Choosing the right investment accounts could mean reaching your goals ahead of schedule. Conversely choosing the wrong accounts could mean you don’t have the money when you need it. Know your goal: Whether you’re simply trying to build wealth or you have a specific goal in mind, knowing what you want to do will guide what account type you choose. Three of the most common goals are: Saving for your retirement Saving for a major purchase such as a house Saving for your own or a loved one’s education The big five: Once you know your investing goal, one of these five types of accounts should likely do the trick: IRAs 401(k)s Health Savings Accounts (HSAs) Individual (or Joint) Brokerage Accounts 529 plans Saving for retirement? Look at these tax-advantaged accounts: IRAs are used to save for retirement, offering unique tax advantages. Unlike a 401(k), your contributions don’t automatically come from your paycheck and the annual contribution limits are lower, about three times lower in fact. An IRA can be an excellent choice. They also may be subject to penalties for early withdrawals. 401(k)s are retirement accounts offered by employers, providing tax advantages similar to an IRA. Contributions are automatically deducted from your paycheck and sometimes employers match a percentage as an added benefit. Keep in mind, you’ll usually incur penalties for early withdrawals. HSAs are designed primarily to help individuals pay for health care costs but once you turn 65, you can use them for anything you want without incurring penalties. Plus, you enjoy triple the tax advantages. Things to know about retirement investing accounts: There are limits: Retirement accounts have different contribution limits (the amount you can deposit each year) based on account type. If you’re looking to save an uncapped amount each year, a brokerage account can be used after maxing out retirement accounts. Did someone say tax-advantaged? The tax advantages of 401(k)s and IRAs come in two flavors: Roth and Traditional. A Roth account may be better if you think you’ll be in a higher tax bracket when you retire. But if you expect to be in a lower tax bracket when you retire, a Traditional retirement account may be better. (Exciting Disclaimer: Always consult a licensed tax advisor.) Did someone say triple-tax-advantaged? With HSAs, contributions, potential earnings, and withdrawals (with a few key stipulations) are tax-free. This is what we mean when we say HSAs enjoy “triple” the tax advantages. The more you know: You can have a 401(k), a Traditional IRA, a Roth IRA, and an HSA at the same, so you can contribute as much as possible toward retirement through tax-advantaged means. Saving for a major purchase? Check out this account: Individual (or Joint) Brokerage Accounts let you purchase stocks, bonds, exchange-traded funds (ETFs), mutual funds, and other financial assets. A joint account is commonly used by married couples to consolidate their investments. Brokerage accounts lack tax advantages but are available to virtually anyone to invest any amount. Saving for education? Then try this account: 529 plans are an ideal choice because earnings are tax-free, as long as you use them for qualified education costs. You can withdraw from the plan as needed for education-related expenses. Hot Tip: Stash your cash until you’re ready. Choosing the right investing account can take some thought. While you're deciding, a high-yield Cash Reserve account can help you earn more from your cash until you’re ready to invest.