White paper summary: The new "medical IRA", using an HSA for tax-free retirement income

Most people use an HSA as simply a tax-advantaged savings account. While this approach is beneficial in the short run, it doesn’t help them plan for their health care costs during retirement — which could be significant.¹

An alternate approach involves keeping funds invested in the HSA for many years to take advantage of the potential for tax-free growth over time — similar to investing in an IRA.²

The key steps include:

• The HSA is held within an account with a selection of investment options
• The HSA investment allocation is aligned with the client’s retirement accounts
• The client contributes to the HSA each year — ideally up to the maximum
• As medical costs are incurred, the client pays for them out of pocket, saving all receipts reflecting HSA-eligible expenses
• Saving receipts is key, because there’s no time limit on HSA reimbursements

If a client who is eligible to contribute up to $8,750 per year — or approximately $712 per month — keeps up that contribution level for 15 years and makes no more withdrawals, they'll have $231,065 at age 65 (assuming a 7% annual rate of return).

They could then withdraw funds tax-free to spend on a wide range of health care costs — including Medicare premiums, prescription drugs, co-pays and more.