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The Triple-Tax Advantage and Retirement

If avoiding taxes were a poker game, then having a HSA or a FSA could be like holding a handful of aces. And, if played correctly, those aces could be worth even more when you retire. HSAs (Health Savings Accounts) and FSAs (Flexible Spending Accounts) are tax-advantaged accounts used to save for out-of-pocket medical expenses.

In fact, some people say they offer a “triple tax advantage” because:

  • You can have the funds deducted from your pay on a pre-tax basis.
  • The interest you earn on these accounts are not taxed (and you can invest them however you like).
  • You can withdraw the money tax-free for medical expenses.

The funds for these accounts can be used for a range of medical needs, not just doctor visits or prescriptions. For example, over-the-counter medicines are covered, as are chiropractor visits, dental expenses, and medical equipment.

There are some differences between HSAs and FSAs. For example, HSAs have higher contribution limits, but they are also only for people who have high-deductible health plans. Also, HSA funds can roll over from year to year, while FSAs have an annual “use it or lose it” rule. Finally, money in a HSA is yours forever, while you must surrender funds from a FSA if you leave your job.

People have been using these types of accounts to save for out-of-pocket medical costs for years. Recently, some financial advisors are sharing that these accounts offer added benefits at retirement time.

With FSAs, the retirement benefit is limited: You can use the full amount of an annual FSA savings in the year you retire, even if you don’t work a full year. So, you could come out ahead in that year.

HSAs, on the other hand, offer what some financial planners say is one of the best retirement-savings plans around. That triple tax advantage continues forever, so you can save now to pay for medical costs after you retire. Then, after retirement, you can use the money for in-home care, retirement community fees, and more. And, of course, when you withdraw the money for those purposes, you won’t pay taxes.

Of course, before you make decisions about HSAs, FSAs, and retirement savings, talk to your benefits administrator and a financial planner, if you have one. It’s a big decision, but it could pay big dividends.

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