What do I mean by triple-tax-free? Consider your 401K. You get an up-front tax deduction in the year you make the contribution. It then grows protected from the drag of taxes. Finally, when you pull out the money in retirement, you have to pay taxes on it. I consider that “double-tax-free.” A Roth IRA, into which you contribute after-tax dollars, but then is never taxed again, is also double-tax-free. But an HSA is different. You get the up-front tax deduction, just like a 401K. You get the tax-protected growth, just like a 401K and a Roth IRA. In addition, as long as the money is spent on approved health-care expenditures, it comes out of the account tax-free. Triple-tax-free. There is no minimum income required to contribute or maximum income above which you cannot contribute to an HSA.

If you find yourself wanting to save more than you can put into your retirement accounts, consider using your HSA as a Stealth IRA, the only triple-tax-free retirement account.

Advantages of HSAs

Because an HSA is the only triple-tax-free account, unless you’re receiving an employer match on your 401K, the first retirement contributions you make each year should go into your Stealth IRA. An HSA is different from a flexible spending arrangement (FSA) in that there is no “use it or lose it” provision. If you don’t spend your HSA in any given year, it just rolls over to the next year. Because you don’t need to spend this money for decades, it can be invested aggressively like any other retirement account. If you decide you don’t want to spend it on health care for whatever reason, after you turn 65, it becomes just like any other IRA. You can blow it on a boat without having to pay the 20 percent (not 10 percent like most retirement accounts) early-withdrawal penalty, although you’d still owe income tax on the withdrawal. Still, that’s double-tax-free. Most retirees, however, will have some health-care expenses in retirement because medications, Medicare premiums, and long-term-care insurance premiums are all considered eligible expenses. The 20 percent early-withdrawal penalty, as with most retirement accounts, also doesn’t apply if you die or are disabled.

There is one other loophole worth knowing about: the IRS doesn’t require you to withdraw the money from the HSA in the same year you incur the health-care expenditure. That means you can leave the money growing tax-free in the HSA and keep a running tally of your qualified health-care expenditures and receipts. Then when you need money to buy that sailboat, even before age 65, you pull it out of the account and report an equal amount of health-care expenditures from prior years on your tax form 8889 for that year. Be sure to keep your receipts in the event of an audit. The requirement is that you incurred the health-care expenditure after opening the HSA, not necessarily in the year you withdrew the money from the account—although it wouldn’t surprise me to see this loophole closed in the future.