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Five Legal, But Unconventional Ways To Use Your Tax-Advantaged Accounts

If you know anything about 401(k)s, IRAs, and HSAs, you probably know that the first two are for retirement savings, and the last is for health care expenses. However, these accounts are actually more versatile than they may seem. Here are some unconventional ways to use some of these tax-advantaged accounts:

Roth IRA as Emergency Fund

One of the first recommendations often made by financial planners is to build up an emergency fund of at least 3-6 months’ worth of necessary expenses. However, many people are reluctant to put that much in a regular savings account to the detriment of their retirement savings. There’s also the tendency of people to raid regular savings for things that don’t quite rise to the level of a true emergency.

One way to combat both issues is to use a Roth IRA to build up your emergency fund. (You can use this backdoor method if you earn too much to contribute directly to a Roth IRA.) That’s because unlike with other retirement accounts, Roth IRA contributions can be withdrawn at any time and for any reason without tax or penalty. It’s only the earnings that are potentially subject to taxes and a 10% early withdrawal penalty, and the sum of the contributions comes out first.

The benefit is that any earnings you don’t withdraw can eventually grow to be tax-free after you’ve had the account for at least 5 years and have reached age 59 1/2. This way, you can save for emergencies and retirement at the same time. The fact that you have to complete a withdrawal form to take money out of your Roth IRA and that you’re sacrificing the possibility of tax-free growth may also make it less likely you’ll use the account frivolously.

Keep in mind that you’ll want to make sure that any money that’s part of your emergency fund is somewhere safe and accessible like a savings account or a money market fund, even if it’s in the Roth IRA. After all, you don’t want to invest it in stocks only to see the value down when you most need the money. Once you’re able to accumulate sufficient emergency savings somewhere else, you can then invest the Roth IRA in something more aggressive for retirement.

401(k) for A First Time Home Purchase

Do you have a retirement plan from a previous job? By rolling it into an IRA, you can use up to $10k of it for a first-time home purchase without the normal 10% early withdrawal penalty. It doesn’t even have to literally be a “first-time home purchase.” You just have to not have owned a home in the past 3 years.

Yes, you’re raiding your retirement account, but owning a home that will eventually be paid off can be extremely beneficial to your retirement. Just be sure that you’re ready to buy a home. Otherwise, depleting your retirement account can be the least of your worries.

401(k) for Education Expenses

The same is true for rolling a retirement plan from a previous job into an IRA and then using it for qualified education expenses without a penalty. Before using retirement savings for education expenses, ensure you’re on track to retire without those assets. After all, there is no financial aid for retirement.

Roth IRA for Health Insurance in Retirement

If you plan to retire before qualifying for Medicare at age 65 and can’t get health insurance through your employer or your spouse, you might want to consider purchasing health insurance through the insurance exchanges. Depending on your taxable income, you may also be eligible for subsidies that can make the cost of health insurance through the exchanges significantly less. That’s where the Roth IRA comes in to help you control your taxable income.

Since withdrawals from the Roth IRA can be tax-free, you can use your Roth IRA to cover your retirement expenses until you turn 65 without it affecting your eligibility for the subsidies. According to this calculator, a 60-yr old couple would pay about $8,500 per year for a mid-level “silver plan” if they had $100k of taxable income. With a $30k taxable income, their premiums would be about $267 per year. That savings of over $8k per year is likely to overwhelm any other factors impacting their decision between Roth and pre-tax contributions.

HSA for Retirement

You may be aware that HSA distributions are tax-free for qualified health care expenses, but they’re also penalty-free for any purpose after age 65. That means an HSA can double as a tax-deferred retirement account. Keep in mind that they will still be tax-free for health expenses in retirement, which a Fidelity study estimates to be about $315k over the expected remaining life of a 65-yr old couple.

For that reason, you may not want to withdraw from your HSA today even when you have qualified medical expenses but instead, allow the money to continue growing tax-free. Of course, this assumes you have adequate income or savings to cover your medical expenses now. You also can invest your HSA dollars to grow for retirement.

There are lots of ways to use various tax-advantaged accounts. You’re not limited to their primary purposes. The key is to understand your options and do what makes the most sense for you.