3. Health Savings Account (HSA) Distributions

Healthcare is consistently one of the largest expenses retirees face. A Health Savings Account (HSA) is arguably the single most powerful account in the American tax code because it offers a rare “triple tax advantage.”

• Tax-deductible contributions: Money you put into the HSA lowers your taxable income for the year.
• Tax-free growth: You can invest the funds inside the HSA, and the interest, dividends, and capital gains accumulate tax-free.
• Tax-free withdrawals: When you pull the money out to pay for qualified medical expenses, you pay no taxes.

To contribute to an HSA, you must be enrolled in a High Deductible Health Plan (HDHP). Many savvy investors pay for their current medical expenses out of pocket, leaving their HSA funds invested to compound over decades. Once you reach retirement, you can withdraw those funds completely tax-free to cover Medicare premiums, copayments, dental care, vision care, and hearing aids.

If you keep your receipts, you can even reimburse yourself tax-free in retirement for medical expenses you paid out of pocket years earlier. There is no time limit on when you must reimburse yourself, provided the expense occurred after you established the HSA.