Use HSAs now and max out your contributions, invest the money, and use the IRS “shoebox rule” for additional tax benefits.
Fidelity recently estimated a 65-year-old couple, retiring this year, will need $275,000 to cover health care expenses. Say you have a Health Savings Account (HSA) because you are enrolled in your employer’s high deductible health plan (HDHP). If you and your employer are contributing a total of $3,000, from around age 26 to age 66 (40 years), then you will have $120,000 vested. Assume an 8% rate of return, your investment will be worth $842,343.12 in 40 years (calculated by Calculator.net).
Assuming you have moderate health expenses every year, resist the temptation to reimburse yourself right away! If you have $1,000 in health care expenses on average for those 40 years, save the documentation of those $40,000 in expenses. Using the IRS “shoebox rule,” you can reimburse yourself for those expenses at any time after you have established your HSA.
In other words:
There is no time limit on when an HSA distribution must occur. An HSA holder can choose to delay taking an HSA distribution to pay or reimburse qualified medical expenses incurred in the current year and can use a current-year HSA distribution to pay or reimburse qualified medical expenses incurred in any prior year, so long as the expenses were incurred after the HSA was established. If the HSA distribution is being taken on a tax-free basis, however, the HSA holder must keep records sufficient to prove that the expense was a qualified medical expense, that it was not previously paid or reimbursed by another source, and that it was not taken as an itemized income tax deduction in any prior taxable year. While there is an increased recordkeeping burden involved in delaying tax-free HSA distributions (i.e., HSA holders may need to keep tax and health plan records for longer than they otherwise would have kept them so that they can be used to substantiate a future HSA distribution), this “shoebox rule” will give HSA holders an opportunity to maximize the tax-free growth of their HSA funds.
Provided you have been patiently documenting your HSA-qualified expenses, you can take a tax-free distribution out of your HSA at age 66 to reimburse yourself for those expenses, while still having sufficient funds to offset your projected $275,000 health care expenses in retirement. Additionally, HSAs can be used to pay for some health insurance premiums and may be used for any purpose after age 65.
EBIA XV.D. Timing Issues for Tax-Free HSA Distribution