HSAs: Untapped for Retirement
Health Savings Accounts (HSAs) boast what other investment accounts cannot: triple tax benefits for eligible medical expenses. They also offer another way to save for retirement. However, investors may need to overcome some misconceptions to make the most of this largely untapped benefit. Retirement advisors can help with that.
HSAs Gain Popularity
HSAs are becoming more popular as employers seek ways to corral health care costs and give employees more control over medical decisions. According to HSA provider Devenir , 22.9 million accounts hold $49.8 billion in assets today. By 2019, those numbers are expected to rise to 27.5 million accounts with $64 billion assets.
Today, most HSAs are funded through employee contributions, but an increasing number of employers match or contribute a fixed amount. Individuals can open and contribute to an account on their own, however not many do. Either way, there is one stipulation: You must have a high deductible insurance plan to contribute.
Triple Tax Breaks for Medical
HSA money can cover numerous qualified out-of-pocket medical costs. Those include co-pays, deductibles, dental, vision, prescriptions, insurance premiums, in-home nursing, nursing homes and the list goes on. Those on Medicare can't contribute to an HSA, but they can use previous savings for the same kinds of expenses.
Participants enjoy tax advantages in three ways:
- Contributions are income tax deductible
- Earnings grow tax-deferred
- Qualified medical expense withdrawals are tax free
And, HSA advantages extend into retirement and beyond. At death, a spouse may continue receiving the preferred tax treatment with a spousal rollover.
HSAs for Retirement
Beyond today's benefits, HSAs can be used for medical expenses in retirement. Investors may be wise to take advantage of every savings option available, especially considering how much medical expenses could cost in retirement. Those costs are projected to soar for retirees, requiring up to 59 percent of what a couple receives from Social Security.
While the potential benefits may inspire investors to save with their HSAs, there are also a few drawbacks.
HSA Pros and Cons for Retirement
Benefits
Flexible Contributions
- Employers, relatives or anyone else may contribute to your HSA
- Contributions are not counted against 401(k)s, IRAs or other retirement account limits
- At age 55 you can make catch-up contributions
Investment Variety
- Options may include stocks, bonds, mutual funds, money markets, CDs, bank accounts and others
- Some plans offer self-directed brokerage windows
Tax-Deductible Limits
- Contributions can be made up to April 15 of the following year
- Limits are $3,450 for individuals, $6,900 for families in 2018 ($3,500 and $7,000 for 2019)
Less Constrained Withdrawals
- There are no time limits for using the money and no required distributions at age 70½
- After age 65, you can use the funds for any retirement expense—not just medical*
* Before 65, non-qualified medical expenses carry a 20 percent penalty.
Challenges
Complex Financial Decisions
- Participants find it difficult to decide between investing in a 401(k) pretax, 401(k) Roth, IRA or HSAs for retirement
- It can also be hard to project current versus future tax rates and medical expenses to know how much to save now
Too Few or Too Many Investments
- Depending on the provider, investment choices may be limited or unlimited
- Too few can hinder diversification needs
- Too many can overwhelm and lead to inertia
Investment Hurdles
- Typically, you must meet minimum thresholds before you can invest HSA money
- Investment decisions require you to consider when the funds will be used: in the short- and medium-term, in retirement or both
Cost Constraints
- Investment prices and options tend to cost more than 401(k) plans
- Administrative fees can also be high
Perception Is an Obstacle
Confusion about HSAs is a barrier for retirement savings. Participants tend to treat their accounts like "use-it-or-lose-it" flexible savings accounts. According to the Employee Benefits Research Institute, very few maximize their contributions, and most draw out all funds each year. Only three percent of HSA assets are investable (other than cash).
You Have a Unique Opportunity
Advisors have a unique opportunity to assist both employers and employees with HSAs.
For employers, advisors can translate their retirement plan skills to help plan sponsors with HSA selection, plan design and investment menus. All of these influence employee retirement readiness, which is always a top priority for plan sponsors.
Participants need education, help prioritizing savings accounts, investment guidance and overall retirement planning. The industry has just begun to develop technology that helps participants sift through the decision process. Planning should include the very critical need of paying for medical expenses in retirement. For this, an HSA can play a role.
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Diversification does not assure a profit nor does it protect against loss of principal.
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This information is for educational purposes only and is not intended as tax advice. Please consult your tax advisor for more detailed information or for advice regarding your individual situation.
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