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 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.
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:
And, HSA advantages extend into retirement and beyond. At death, a spouse may continue receiving the preferred tax treatment with a spousal rollover.
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.
Less Constrained Withdrawals
Complex Financial Decisions
Too Few or Too Many Investments
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).
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.
Diversification does not assure a profit nor does it protect against loss of principal.
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