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Use an HSA for extra retirement cash

By Paula Pant ·
Friday, August 22, 2014
Posted: 6 am ET

For most people, it is a challenge to save enough money to max out the annual contributions to both a 401(k) and an individual retirement account, or IRA.

After all, the hurdle is pretty high. In 2014, the contribution limits for a 401(k) and IRA are $17,500 and $5,500, respectively, for eligible people age 49 and younger. People age 50 and older can contribute an additional $5,500 to a 401(k) and $1,000 to an IRA.

But there is a small subset of people who are able to save that much cash, and more. These folks are looking for additional places to put their savings.

If you are looking for another way to solidify your retirement, consider the health savings account, or HSA.

How the HSA shores up your retirement

A health savings account is intended to allow you to save money for medical expenses. Not only do you get a tax break in the year you make the contribution, but you also can withdraw the money tax-free if you use it for qualified medical expenses, such as a hospital bill or a doctor visit.

To be eligible to open an HSA, you must be enrolled in a high-deductible health plan, or HDHP, that is HSA-compatible. Your employer's human resources department can tell you whether you are in an HSA-compatible plan. If you bought insurance on the private market, look at the information packet that came with your health insurance policy.

In 2014, eligible people can contribute $3,300 to an HSA if they have individual coverage, or $6,550 per year if they have family coverage. People age 55 or older can contribute an extra $1,000.

While an HSA is a great way to save for medical expenses, it also can serve as a source of extra retirement cash.

Here is how to do it: When you make contributions to your HSA, leave them alone so they will grow each year. If you have a medical bill, pay for it with funds from a savings account or other after-tax money -- if you have the funds to do so -- rather than tapping your HSA.

Then, once you reach retirement age, you will be able to withdraw your HSA contributions penalty-free if you use the money for qualified medical expenses. That can help you with medical expenses at a time when you no longer will have a job to provide income.

You can also tap an HSA for nonmedical expenses in retirement. However, keep in mind that if you withdraw the money for such expenses, you still have to pay taxes on it, even if you are retired.

Bottom line

If you are a high-income earner who has maxed out traditional retirement accounts and wants to save even more, the HSA provides a great option to increase your savings for both medical and nonmedical costs.

Paula Pant helps people ditch the cubicle and live on their own terms. She's traveled to 30 countries, owns seven rental property units and hasn't had an employer since 2008. Her blog, "Afford Anything," is the gathering point for a tribe that refuses to say "I can't afford it." Follow Paula on Twitter: @AffordAnything.

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