Updated July 11, 2019. Saving for retirement has its tax advantages. Contributions to 401(k) plans are tax-deferred, while contributions to traditional individual retirement accounts are tax-deferred and (largely) tax-deductible.
Uncle Sam caps how much money you can put into these accounts each year. For 2018, Americans can put up to $5,500 in an IRA and up to $18,500 in most 401(k) plans, with those limits set to rise in 2019.
But there is one often overlooked way to buck those limits a bit: Use a health savings account as a second IRA.
The HSA tax hack, explained
HSAs are tax-advantaged savings accounts that allow people with high-deductible health care plans (HDHPs) to save for future medical expenses. You can only open an HSA if you have an HDHP, but many Americans do.
For 2018, Americans with HDHPs can contribute up to $3,450 per individual or up to $6,900 per family into an HSA.
Those contributions are tax-deductible and withdrawals are tax-exempt as long as you use the funds to pay for eligible medical expenses — most notably, but not limited to, your deductible (the amount of money you pay before insurance kicks in) and copays for prescription drugs or doctors' visits.
But HSA contributions also roll over year-to-year. They're not "use it or lose it", like the money in a flexible spending account. They also can be used for non-medical expenses penalty-free once you turn 65 (though you'll pay income taxes for withdrawals made for non-medical expenses). As such, HSAs can sometimes serve as a de facto supplemental retirement account.
You can deduct any contributions you make before April 15, 2019 on your 2018 tax returns. (Note: The same rule applies to IRAs, so there's still time to lower your taxable income in the new year.)
Opening a health savings account
Retirement and tax advantages aside, if you have an HDHP, it's prudent to have an HSA. Otherwise, you risk a mailbox full of medical bills you can't readily pay.
Opening an account is straightforward. First, see if you're eligible for an HSA. Next, compare plans across multiple providers and choose the one that’s best for you.
If you're interested in potential retirement savings, consider an HSA that lets you invest your funds in stocks, bonds and other investments. Check out this explainer for more ways an HSA can help your nest egg.