Let’s say you have a stable job, and are ready to settle down, and start thinking about retirement. No fun, right? It can be difficult to think about money you’ll need 20-30 years from now.

The good news is, you’re already a step ahead if you have an HSA. Why? Two main reasons:

1. Tax benefits that build over time
2. Investment opportunity

Let’s explore how these two benefits of an HSA are an advantage for retirement planning.

HSA Tax Benefits: A Retirement Planning Boost

When it comes to retirement, it’s all about finding that little extra you can put away each month or year, and then letting that amount grow over time. But where is that seed money going to come from? One source can be tax savings. You’ll see below that it can be pretty simple to save thousands on taxes just by contributing to an HSA.

Don’t worry, the tax benefits of an HSA actually aren’t very complicated. The bottom line is that when you contribute to an HSA, you can report lower income, meaning you pay less tax.  

> Wait, how do taxes work again?

Here is how that works if you have $70,000 in income as the head of a household, and contribute $5,000 into your HSA.

That’s more than $1,000 that stays in your pocket each tax season. Pretty cool! And remember, that $5,000 ($50,000 over ten years) you put in your HSA is still your money. Those HSA funds can be withdrawn tax-free for qualified medical, dental, vision and prescription expenses for you and your dependents. They can cover your deductible, and max out-of-pocket, all tax free.

But medical expenses aren’t the only use for HSA funds, which brings us to the next key retirement benefit of HSA funds: investing.

Investing HSA dollars

Depending on who is facilitating your HSA, your HSA money can be invested, similar to other retirement funds. That means your HSA dollars are earning extra money instead of lying dormant. Generally, your HSA balance must be over a certain threshold to invest funds.

But why do you need medical dollars in retirement? Well, you will have medical expenses as you age. But if you have more than you need, don’t worry. After the age of 65, HSAs behave similarly to a traditional IRA. There is no penalty for using the funds for non-medical purposes.

So is it smart to put your tax savings into your HSA? Yes! Or put them in another kind of retirement account that grows over time.

How Taxes Work
For federal taxes, the government takes a percentage of your income, and that percentage is based on how much income you make. So for example, say you’re the head of a household, and you report $70,000 in income for the year. You’ll pay 10% taxes on your first $13,850, or $1,385. You’ll pay 12% on the next portion of your income, up to $52,850 (that’s $4,680 in taxes). After that, your income tax percentage goes up quite a bit. For the remaining income, you’ll pay 22% taxes. You made $17,150 more than $52,850, so 22% of $17,150 is $3,773.

Okay, deep breath. Let’s add up your taxes.
$1,385 + $4,680 + $3,773 = $9,838

How HSAs Help Lower Taxes
Let’s say I make $200. The government might tax 10% of that. So I have to pay $20 in taxes. But what if I could somehow report that I only made $100? 10% of $100 is only $10. So I just cut my taxes in half. Cool!

That’s exactly how it would work if I contributed $100 to my HSA.

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