Investors almost never get to have their cake and eat it too. When it comes to saving for retirement, you generally have to pay taxes on the money you put away, one way or the other.

Traditional retirement accounts, such as 401(k)s and individual retirement accounts, come with an upfront tax break. Contributing to them lowers your taxable income for the year you invest, but you’ll owe taxes when you withdraw the money.

Roth versions of those accounts work in reverse: You fund them with money you pay taxes on, and provided you follow certain rules, can withdraw your investments, along with whatever profits they’ve earned, tax-free when you retire.

But a third type of account comes with tax-deductible contributions, tax-free growth in your investments and tax-free withdrawals on certain expenses in retirement: health savings accounts.

If you don’t think of HSAs as long-term investing accounts, you’re not alone. Only 12% of people who hold an HSA use it to invest in assets other than cash, according to the latest research from the Employee Benefit Research Institute.

The other 88% are missing out, says Jeremy Finger, a certified financial planner and founder of Riverbend Wealth Management. “An HSA is a powerful tool for retirement planning,” he says. “If you qualify, it’s favored by financial planners because it comes with a triple tax benefit.”

Here’s how HSAs work, and why the pros recommend using them to invest for long-term goals.

How health savings accounts work

Health savings accounts are only available to people enrolled in high-deductible health plans. For 2023, those are plans with a minimum deductible — the amount you pay out-of-pocket for medical expenses before your insurance kicks in — of $1,500 for individuals or $3,000 for families.

In exchange for paying higher deductibles, enrollees in these plans typically pay lower monthly premiums.

Any money you put in an HSA lowers your taxable income and can be used to cover medical expenses. In that regard, it may sounds similar to a flexible spending account — a benefit offered by many employers with more traditional insurance coverage. But the HSA comes with some extra benefits.

Unlike with an FSA, which typically has a “use it or lose it” provision, the contributions are yours. If you don’t spend the money during a particular year, it will roll over indefinitely.

You’re also allowed to invest your HSA money in stocks, bonds, exchange-traded funds and mutual funds. “If you can save a couple thousand dollars a year and have that money compound over time, you could build a nice little nest egg for retirement,” says Jake Spiegel, research associate of health and wealth benefits at EBRI.

How to utilize an HSA for long-term savings

In 2023, you can contribute a maximum of $3,850 (for singles) or $7,750 (for families) to an HSA. Workers over age 55 can put away an extra $1,000 per year, but once you enroll in Medicare, you can no longer contribute.

Every dollar you add lowers your taxable income in the year you invest. Your money then grows tax-free, and as long as you spend it on qualified medical expenses, you won’t pay tax when you withdraw it either.

That’s why, in general, the best strategy when it comes to an HSA is to invest in it just as you would any other long-term portfolio. “Leave it in there and let it grow,” says Finger. “It’s like having a second Roth IRA.”

There are some exceptions. If you have high-interest debt or haven’t built an emergency fund, focus on tackling those goals first, says Finger. And the first stop for your retirement savings should likely be your employer-sponsored 401(k) if it offers a matching contribution. “That’s a 50% or 100% return on your money,” says Finger.

But if you have your financial bases covered, it may make sense to pay medical costs out of pocket for now and let your HSA money grow. Just make sure you keep the receipts, ideally in an organized, digital file rather than a shoebox.

“Those expenses never go bad. You can have 20 years of expenses, and then in retirement you want to take a fancy vacation,” says Finger. “You can take $15,000 out of your HSA and use those receipts to make your withdrawal tax-free.”

In other words, the medical expenses you use the money for don’t have to be contemporaneous. As long as you have the receipt proving you paid at one point or another, you can always reimburse yourself from your HSA.

Plus, there’s also a good chance that money you invest now is going to come in handy in retirement, even though it has to be earmarked for health-care expenses. The average 65-year-old couple can expect to spend $315,000 on health-care expenses in retirement, according to a recent study from Fidelity.

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