Many people have opted to open Health Savings Accounts (HSAs) as a way to make the most of their health care spending. There are several tax-saving benefits to the accounts. Contributions are made pre-tax, withdrawals for qualified medical expenses are not taxed, and unused balances can be invested for potential tax-free growth.

Retirement and Your Health Savings Account

Another less-well-known benefit of the HSA is that it’s a potentially valuable saving option for future bills, particularly in retirement. In a recent Schwab Insights article, authors Rob Williams and Robert Aruldoss explain the potential benefit this way: “Many people see their health care costs rise in old age. The trick is finding the right balance between your contributions, your withdrawals and your ability to let your savings accrue over time.”

As mentioned previously, money saved in an HSA can receive a triple tax exemption. By comparison, 401(k) retirement plans offer a double tax exemption – you pay no income taxes on contributions and no tax on investment earnings. You do, however, pay taxes on distributions in retirement with a 401(k).

“That triple exemption can make HSAs a uniquely powerful tool for building a nest egg for future health care expenses,” point out Williams and Arudloss, both retirement income experts at the Schwab Center for Financial Research.

For withdrawals, there is another tax-related aspect that makes the HSA an attractive savings tool for retirement. HSA spending for non-qualified expenses, regardless of your age, will require you to pay income tax on the amount withdrawn. If you’re under 65, you will also incur a 20 percent penalty on that withdrawal. Yet, after age 65, there is no penalty. This offers some flexibility for your retirement savings.

“After age 65, qualified withdrawals for medical bills are untaxed, and non-qualified withdrawals are treated like normal income,” stated Williams and Arudloss. “That makes non-qualified withdrawals a bit like withdrawals from a 401(k) plan or traditional individual retirement account (IRA), but without the required minimum distribution rules that kick in at age 70 ½ for investors with such accounts.”

If you have an HSA or are eligible for one, make sure you are taking full advantage of the tax benefits. If you have questions, talk with your advisor.