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Retirement plans get a lot of attention, but a Health Savings Account may be the way to go

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One of the employee benefits that receives the most attention is the retirement plan. However, you might have access to a savings account with a potential advantage over your 401k – the Health Savings Account.

Carl Carlson, CEO of Carlson Financial, said similar to a 401k or IRA, Health Savings Accounts allow you to put pre-tax money into an account and it will grow tax-free.

Retirement accounts allow you to either make pre-tax contributions (traditional) OR take tax-free withdrawals (Roth). Both allow for tax-deferred growth. But an HSA is “triple tax-advantaged.” You can contribute to them on a pretax or tax-deductible basis, your savings grow tax-free over time, AND you can have tax-free withdrawals if withdrawals are used for qualified medical expenses. And there’s a fourth, less talked about tax advantage. Your 401k contributions will still have Social Security and Medicare taxes taken out. HSA contributions will not.

Anyone with a high deductible health insurance plan can get an HSA, Carolson said. It doesn’t matter if your employer offers an HSA or not, you can open one on your own and receive the same benefits. But everyone who contributes to one must be on an IRS-approved high deductible health plan.

One of the biggest restructions is that for withdrawals to be tax-free, they must be used for qualified medical expenses. You can use the account for medical expenses at any age. However, if you need to use the money for something other than medical costs, you will pay taxes and a 20% penalty for doing so if you are under age 65. After age 65, you can use the account for whatever you’d like but you will have to pay income tax on the growth, just as you would with an IRA.

A good strategy would be to contribute at least enough to your employer’s retirement plan to get the max company match, then switch to prioritize your HSA. Save at least as much in the HSA as your annual deductible. If you can save enough to do both during the year, split your contributions to meet both goals, or even max them both out!