An HSA can be used for current medical expenses, but it can also be a valuable tool for retirement. If cash flow supports it, allowing those dollars to remain invested and compound tax-free can help cover qualified medical expenses later in life.
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John, I had a client tell me the other day that they use all of their HSA money to cover their medical expenses. Is there anything they should be considering when they do something like that?
Well, Austin, here’s what I tell my clients. Max out your HSA, and if your cash flow supports it, pay your out-of-pocket medical expenses out of cash flow. And let your health savings account compound tax-free until you reach retirement. This is when those dollars will have the most utility. In the meantime, these dollars can be invested and will compound tax-free and distribute tax-free at retirement for qualified medical expenses. Medical expenses are oftentimes a retiree’s largest and most onerous expense. Essentially, we are saving these dollars for when they will have the greatest impact in their lifetime.
So in addition to HSA’s not being a use it or lose it, one could argue that you should save it for where health care expenses will be the biggest part of your monthly budget, which is typically in retirement.
Exactly.