Are you aware that a health savings account could be used as a source of tax-free income for retirement? Saving for medical costs, a major expense in retirement, is necessary and an HSA is a vehicle for that. An HSA offers more tax advantages than either a 401(k) or an IRA and may be used to generate tax-free income in retirement.

Federal and state tax payments are not required on savings in an HSA. The money you deposit grows tax-free and may also be withdrawn tax-free when used, now or in retirement. Therefore, experts recommend contributing the maximum allowed to both an HSA and a 401(k). For those with limited funds, first contribute to a 401(k) for the company match (if they offer one), then to an HSA until able to save more.

Here's where it pays off to get creative. One option is to choose a high-deductible insurance plan with lower premiums, freeing up money to contribute to an HSA. Perhaps driving an older, paid-for automobile would free up money for this. Grab coffee or your beverage-of-choice and brainstorm ways to free up money to meet future needs; make a contest out of it! If the thought of retirement is worrisome, act now to alleviate deficits later!

This plan reaps the greatest benefit when the money saved compounds over time if it has not been used on medical expenses now. That money would then be available for medical needs during retirement. All the taxes that would have been paid are not withheld on HSA contributions so that more money is available to use for future medical bills.

Extra tax advantages of an HSA allow for greater savings for retirement than later withdrawing money from a 401(k) and paying taxes at that time, while also increasing take-home pay now. It is important to understand, however, that money withdrawn from an HSA must be used for qualified medical, dental, and vision care expenses or for certain Medicare premiums or partial payment of long-term-care insurance premiums. If used for other expenses, income tax will be owed, along with a 20% penalty if under age 65. Consult an expert for details and the best course for your situation.For more details, see article "How to Get Tax-Free Retirement Income" by Anne Tergesen, The Wall Street Journal, 11/13/17.

Get thinking outside-the-box!