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How to use your HSA & 401(k) together for financial independence

Chances are that when you think of a Health Savings Account (HSA), your first thought probably isn't about retirement savings, but for many people, it's a great vehicle for future financial needs.

What makes the HSA so great for long-term planning

- Funds rollover indefinitely – One of the best features of Health Savings Accounts is the fact that they don't have that "use it or lose it" rule. Once money is deposited to your account, there is no time limit on when it must be spent on qualified healthcare expenses, which means when deciding how much to deposit to your account each year that you qualify, you don't have to worry about estimating how much you'll need for the coming year. The best advice here is to save as much as you can.

Why that's great for retirement: Any funds left in your account once you retire and join Medicare can continue to be used for out of pocket medical expenses, but they can also be used to pay your Medicare premiums as well as for long-term care insurance or stays in a nursing home facility. Since healthcare costs are one of the biggest expenses potentially facing people in retirement, your HSA is a great place to save to help out with that expense.

- No taxes on qualified withdrawals -  Another of the best features of HSAs is that you get to deduct your contributions from your income, then as long as you use withdrawals on qualified healthcare expenses, there are no taxes then either. Any growth in your account through the years is also tax free, which is why many people use the term "triple-tax-free."

Why that's great for retirement:  Without an HSA, you're likely to have to make withdrawals from your retirement accounts to pay healthcare expenses, which means that if you elected pre-tax contributions when you put the money into your 401(k), you'll pay taxes on the money that comes out. Wouldn't it be great to avoid that by using your HSA instead? Save your 401(k) savings for fun stuff like travel and adventures in retirement.

- You can invest your funds for growth – Once you've built up a decent amount of savings in your HSA and are reasonably certain that you won't need at lease some of the funds for quite awhile, you can invest those funds for growth, much like you do in your 401(k). The best part is that there are no taxes on any income or gains you make through investing, so it's totally tax-free!

Why that's great for retirement: The longer you have until retirement, the more you can invest for growth, meaning you can choose more aggressive investment options as long as you're ok with fluctuations in value through the years. The difference is that you'll probably always want to keep at least some of your HSA in cash to be there in case of unexpected large medical expenses, so you don't have to worry about making a withdrawal during a down market. Otherwise, you can take advantage of the tax-free status of your account and make the most of the savings to pay for your future healthcare.

Think of your HSA as a supplemental retirement savings plan

Your dollars are limited, so make the most of your savings. When it comes to deciding where to save for the future, consider this:

First: save enough in your workplace retirement account (401(k) or 403(b)) to capture any matching dollars that your company offers.

Next: save up to the maximum allowed each year in your HSA, while trying to avoid spending those dollars unless you'd have to compromise other goals instead. Remember, you can always go back and reimburse yourself if you change your mind for previously spent money.

After that: once you've maxed out your HSA savings each year, if you still have dollars to save, then you may either want to save into a Roth IRA or continue putting money into your 401(k) or 403(b) up to the yearly maximum.

The bottom line

If you are enrolled in an HSA-eligible healthcare plan, make sure you're thinking of the HSA as an opportunity to save for your long-term healthcare needs and not just those that might come up in the next year. Depending on how much time you have until retirement, you could realize significant tax savings while also making it easier to retire when you're ready!