IRAs are excellent retirement accounts. They give you the flexibility to invest how you want and you can choose when you want to pay taxes on your funds. But they also have a pretty big drawback. You're only allowed to set aside up to $7,000 in 2024 or $8,000 if you're 50 or older. That's far less than the $23,000 and $30,500 contribution limits, respectively, for 401(k) owners.
You may feel as if you're stuck waiting until 2025 if you've maxed out your IRA and you don't have access to a 401(k). But you might have another option.
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You don't need a retirement account to save for retirement
Retirement accounts are usually the preferred place to keep long-term savings because they offer tax advantages that help you keep more of your money. But health savings accounts (HSAs) offer many of these same benefits.
HSAs were designed to help people with high-deductible health insurance plans save for medical costs in a tax-advantaged way. They can also double as retirement accounts, similar to traditional IRAs but with the bonus of tax-free medical withdrawals at any age.
Not everyone can open an HSA, though. In 2024, individuals must have an eligible health insurance plan with a deductible of $1,600, and families need a plan with a deductible of at least $3,200. If your plan doesn't qualify, you're not eligible to contribute to an HSA this year, though you can still use any HSA funds you have from previous years.
Individuals eligible to save in HSAs may set aside up to $4,150 in 2024, while families may set aside up to $8,300. Adults 55 and older may set aside an additional $1,000 this year.
If a single adult under 50 maxes out their IRA and HSA, they could set aside $11,150 for retirement this year. That's still not as much as 401(k)s allow, but it should be plenty for most savers.
Help your HSA funds go as far as possible in retirement
It's crucial to choose an HSA provider that allows you to invest your funds if you plan to use your HSA savings for retirement. Otherwise, you'll earn only a small amount of interest each year, much as you would with a savings account. The interest might not even keep up with inflation, so your buying power could decline even while the dollar value of your account increases.
Investing can help you increase your buying power over time, though it carries a risk of loss. Ensuring you diversify your portfolio adequately and minimize how much you're paying in investment fees is key to growing and keeping as much money as possible.
It's also important to avoid taking early withdrawals from your HSA if you can avoid it. Medical withdrawals are penalty-free at every age, but if you take money out before retirement, you'll have to save more to make up for it. Non-medical withdrawals also carry a 20% penalty if you're under 65.
Once this penalty goes away, the account is similar to a traditional IRA. That means you'll owe taxes on your non-medical withdrawals, but medical withdrawals remain tax-free. You could reserve your HSA funds for retirement medical expenses if you hope to minimize your future taxes. Stash money for other expenses in other accounts, like your IRA, 401(k), or a taxable brokerage account.
