How To Create A Triple-Tax-Free Million Dollar Retirement Plan

This guest post was originally written by Greg Phelps, CFP®, and updated by me (Brad Kingsley, CFP®). This excellent article on leveraging a Health Savings Account for retirement can save you a ton of money in taxes. This is definitely worth reading!

A triple-tax-free million-dollar retirement plan?

This is by far one of my favorite money tricks. Most investors haven’t yet taken advantage of it, and when they do they’re not using it properly. I mean, who gets a “triple-tax-free anything” in life? You know the old saying—“The only 2 certainties in life are death and taxes.”

Recently I interviewed Garrett Prom, CFP®, EA, and CRPC® for the Wealth Summit. Garrett is an expert at using the Health Savings Account for retirement income and tax planning.

Together we dug into this concept of a triple-tax-free million-dollar retirement plan. A relatively simple concept that certainly sounds catchy!

Here’s how it works

The current Health Savings Account (which I call the “medical IRA”) provides a tax deduction when you fund it. The family contribution is limited to $7,750 per year (2023).

If you’re in a 22% tax bracket, you’ll save $1,705 in taxes right off the bat! That’s not a bad start at all.

Note from Brad: That’s just a federal income tax example. When you add state income tax savings into the mix (an additional 7% in South Carolina) you can often save over $2,000 on taxes from your family HSA contribution!

The HSA contribution limit grows with inflation over time just like any other IRA or 401k limit. Garrett used a reasonable 2% per year increase for inflation.

Most Health Savings Accounts allow you to invest your balance. Some of them even provide access to some great low-cost no-load mutual funds from companies like Vanguard. Always look for low-cost investment options when building a long-term investment portfolio.

Optum Bank, HSA Bank, and Lively are good places to open your HSA. They both allow you to invest your money in Vanguard mutual funds. [Note from Brad – I personally use Lively and have had a very good experience with them. They let you link to TD Ameritrade and invest your funds however you like!]

While you should always diversify your investment portfolio, typically your more aggressive investments should be placed in your Health Savings Accounts first. Balance the remainder of your investments into a well-rounded overall plan, with your higher risk and higher potential return mutual funds in accounts like Roth IRAs and this HSA strategy.

Assuming an 8% annual growth rate, that $7,750 contribution each year (about $646 a month) increased with inflation turns into more than 1 million dollars after 30 years. Check it out:

Not too tricky so far. If you invest $7,750 per year for 30 years at 8% and grow your yearly contribution at 2%, you end up with over 1 million dollars.

The tax benefits are another story altogether (and honestly why this is such a cool strategy). If you’re in the 22% tax bracket, you’ll save over $60,000 in taxes along the way! Now we’re talking about some real money.

Is there a catch?

First, you must qualify for a Health Savings Account. The easiest way to ensure you’re eligible is to call your health insurance provider and simply ask, “Does my health insurance plan qualify for a Health Savings Account?”

If your health insurance doesn’t qualify, you may have an option to “downgrade” your health coverage to a level that may. This is a good follow-up question for them if you’re not eligible.

Once you know you qualify for an HSA, fund it each year. In this case, you fund it with the family maximum and increase it every year the IRS allows.

Here’s where it gets really interesting. If you’ve got a family, chances are you’re paying for doctor visits, eyeglasses, or even braces. That adds up over the years!

Most people fund their HSA never even considering the retirement benefits our tax code allows. When they incur medical costs, they simply swipe their HSA debit card or submit a receipt for reimbursement.

That’s the mistake! Let your HSA grow!

The Health Savings Account has no time limit on reimbursements. You could hang onto those receipts for 3 decades and still use them as expenses for HSA-qualifying withdrawals!

It’s CRITICAL you save electronic copies of your receipts. Personally, I scan them and have them backed up to the cloud. Each one of these receipts is exactly like tax-free cash when you need it!

Paper copies may suffice, but ink fades, and paper gets lost. If you really want to go the extra mile, save paper copies AND electronic copies of your receipts.

Like the Roth IRA, in retirement, you can use HSA distributions to slash your lifetime income taxes by better managing your tax brackets in retirement. We diversify our investment portfolios, so why not diversify our tax base?

The key again is to SAVE YOUR RECEIPTS! Don’t turn them in for reimbursement, and don’t swipe your HSA debit card. Save the receipts and use them as a source of retirement income later.

You can withdraw amounts up to the value of the receipts you’ve saved up anytime from the HSA.

What if I don’t have a million dollars of medical expenses when I retire?

Great question. Not everyone has massive medical expenses throughout their life.

Let’s say you executed this strategy from age 35 to age 65 and you now have a million dollars in your Health Savings Account. Let’s also assume you’ve only accumulated $300,000 of medical expenses (10K a year isn’t a horrible assumption for an active family).

After age 65, you can take HSA withdrawals for ANY PURPOSE! You only have to pay ordinary income tax (no penalties).

Next Step

Look into whether your health insurance qualifies for a Health Savings Account or not. You may just be able to build your own triple-tax-free million-dollar retirement plan!