Email Last Updated Oct 20, 5: You’ll probably want to review my previous pos t to help you understand the further thoughts in this post. In addition to covering your health expenses when you’re employed, HSAs are also a great way to save money for your retirement; you’re not taxed on the contributions going into your account, you’re not taxed on the investment earnings, and you’re not taxed on the amounts that are withdrawn from your account, as long as you use this money to pay for medical bills.

You can also use HSA money to pay for Medicare premiums. Note that the income taxes on any money contributed to a traditional IRA or k are merely deferred until you retire, whereas money contributed to HSAs truly escapes income taxes completely. If you withdraw contributions from your HSA for any purpose other than qualified medical expenses, however, the IRS imposes a 20 percent penalty tax.

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And while this tax no longer applies after age 65, the amounts withdrawn and used for non-medical expenses will be subject to income taxes. If you let your HSA contributions remain invested, you’re typically offered an array of investment options that are similar to the investment menu in your k plan.

And your investment strategy for your HSA should be similar to your k investing strategysince you have about the same time horizon. So decide the appropriate amount of exposure to stocks you’re comfortable with and look for ways to minimize your investment expenses.

Who Can Open an HSA?

Should you spend the amounts in your HSA or leave them invested for the future? I prefer keeping these contributions invested for the future, provided you have enough money from other sources to pay for medical expenses you incur while you’re employed.

I realize with a tight economy, many people will spend the money now, but see if you can find a way to leave some money invested for the future.

You won’t regret it when you reach your Medicare years and have to pay for Medicare premiums and other medical expenses. I’ve heard one rationale for spending your HSA money in the current year, but I don’t buy it. The reason goes something like this: If you pay for medical expenses with HSA money, you’re not paying income taxes on that money.

If you use any other money, you’re using money that’s subject to income taxes, so that’s less efficient. The money you spend on everything else — food, utilities, clothes, entertainment — is paid for with after-tax money, but that doesn’t stop you from paying for them, does it?

And if you had money left over at the end of the year, you’d save it on an after-tax basis, wouldn’t you? For me, the real issue is whether you can afford to save more money for tomorrow through the HSA, or whether your budget is so tight that you need to spend the HSA money for medical expenses in the current year. Stay tuned for my next post that answers these questions..