Why HSAs are good for retirement savings

 

Health Savings Accounts (HSAs) have been around for years, mostly as a way to help workers with high deductible health plans pay for out-of-pocket medical costs. More and more people are choosing this option, and for good reasons.

First, contributions are deductible and grow tax-free. Who doesn’t like that? And second, there’s no denying it’s a welcome relief to have funds you can draw from to help pay for those crazy expensive office visits, x-rays, lab tests, etc.

But HSAs are good for more than off-setting medical expenses. They can also be a powerful retirement savings tool — especially if you’re young and healthy.

Three reasons why

 

We can think of three solid reasons why it pays to at least consider having HSAs as part of your retirement savings plan.

1. You can’t beat the triple tax advantage

Like traditional 401(k) plans or IRAs, all contributions are tax deductible. In 2017, you can contribute up to $3,400 with an individual plan. If you have a family plan, that limit goes up to $6,750. If you are 55 years or older, it bumps up an additional $1,000. For 2018, the individual and family plan limits are increased to $3,450 and $6,900 respectively, while the catch-up amount stays the same.

Your HSA account grows tax free. This means any interest, dividends or capital gains are non-taxable.

Your withdrawals are tax-fee. That is, as long as they are used to pay for qualified medical expenses, (unlike in a traditional 401(k) or IRA where you must pay income tax on all withdrawals).

In other words, you pay no taxes ever on the money in your HSA account as long as you spend it on qualified health care. Truly, a tax-free deal! This is especially appealing to retirees with fixed incomes.

2. You can build a tax-free nest egg dedicated to health care

Typically, HSAs increase over the years with compounded growth of contributions and earnings, creating a tidy tax-free nest egg that can be dedicated to medical costs.

Look at the numbers from Fidelity. They estimate a 65-year old couple retiring this year will need at least $275,000 for health care during retirement (not including long-term care.)* More than half of that cost — $166,540 — could be covered by an HSA, if a couple saved their annual contribution of $6,750 for a family plan each year for 15 years, with a 6% average return. Hands down, such money (tax-free!) would be a huge help during retirement years when health care expenses typically heat up.

3. After age 65 you can use your HSA for non-medical expenses

While the greatest tax savings occur when you use your HSA for medical expenses, you can also tap into it for any reason, including non-medical — after you reach 65 years of age.

Thinking about a new granite countertop? A trip abroad? You can fund such things with help from your HSA. Such flexibility adds to the appeal of HSAs as a retirement savings tool. However, you will still have to pay regular income tax on any non-medical withdrawals.

(And be forewarned — if you withdraw money for non-medical expenses before age 65, you will be slapped with a 20% penalty from the federal government in addition to income tax.)

The upside to an HSA

There are other perks to owning an HSA.

  • It’s portable. It goes with you from one job or employer to the next.
  • You can leave it to your spouse (if listed as your beneficiary) to use for medical costs, tax free.
  • Some employers offer matches to your contributions — free money, folks.
  • Unlike an IRA or 401(k), there are no required minimum withdrawals.

The downside

With all the pluses, it’s only fair to note the downside to using your HSA for retirement. And there is a downside.

HSAs work best if you’re young and healthy.

The idea is to keep your account invested and untouched so it can grow. This means you would need to pay all medical expenses out of your own pocket, without raiding your HSA. If you and your family are healthy and don’t need much in the way of a doctor’s care, this may not be a problem. Likewise, if you’ve got the cash to cover anticipated and unanticipated medical costs, an HSA might be a good fit, as you can afford to just let the HSA monies grow. The younger, the healthier and the wealthier the better.

Who can open an HSA?

Lots of people. Really, there are only two requirements. You must be –

  • Enrolled in a high-deductible health plan that has a minimum annual deductible in 2017 of $1,300 for individuals, and $2,600 for families.  These limits go up in 2018 to $1,350 for an individual plan and $2,700 for a family plan.  (If your spouse uses your insurance as secondary coverage, they too must be enrolled in a high-deductible plan.)
  • Under age 65.

HSA or FSA?

Some people wonder how HSAs differ from Flexible Spending Accounts (FSAs). Basically, there are two key differences.

  • HSAs allow you to roll over the entire unspent amount each year, whereas flexible spending accounts allow you to roll over a maximum of $500 of unused monies each year.
  • HSAs are portable, whereas you’ll typically lose any unused FSA monies if you leave your employer.

In most cases, you can’t have both an HSA and an FSA.


While an HSA doesn’t fit in everyone’s retirement tool box, it is definitely worth a second, and maybe even a third, look.


Barron’s, Health Savings Accounts: The Hidden Retirement Option, 9–18–17


Advisory services are offered by Joslin Capital Advisors, LLC, an SEC Registered Investment Advisor.

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