Why an HSA Account Is a Gift to Retirement Planners
NASA astronauts once saved the International Space Station with an electric toothbrush. They were attempting to replace a power supply unit when they discovered the threads on a bolt were stuck. The tiny bristles on the toothbrush were just the thing to clean the edges, free the bolts, and assure mission success. Sometimes the best tool for the job isn't something you'll find in your tool kit.
The same lesson applies in retirement planning. If you're saving for retirement, take note: The health savings account is the best tool that's missing from your tool box.
Health savings accounts are designed to mitigate the costs incurred by people enrolled in high-deductible health insurance plans. The idea is straightforward: If your insurance policy has a high deductible, you'll likely be saddled with higher out-of-pocket costs for healthcare. So the government created the HSA, which allows accountholders to put their money in the account pre-tax, invest it, and let it grow. Then, when they need to pay a deductible, they can withdraw the funds tax-free, so long as they spend it on qualifying medical expenses. These include eyeglasses, diagnostic tests and services, prescriptions, dental treatments, and physical therapy. So there's no tax on the way in, and no tax on the way out. That's the magic of the HSA. However, it's important to remember that the money can only be used for medical expenses. Any non-medical withdraws before the retirement age of 65 are subject to income tax and a 20% penalty. After you reach 65, non-medical withdrawals are subject only to income tax.
Source: Fool.com
