Could your HSA be a powerful retirement savings tool? Financial Advisors say yes.

Posted by Anthony Carlton on 11/4/19 4:03 PM
Anthony Carlton

With open enrollment in full swing, it’s time for your team to review their health insurance options. A common approach is to check the same box as last year, leaving your health insurance unchanged for another 12 months. 

In making this quick, uninformed decision, most employees aren’t aware of potentially missing out on a powerful retirement savings tool. 

 

HSA's and Retirement Savings Go Hand in Hand

Health Savings Accounts (HSAs) are a tax-advantaged way to set aside money for qualified medical expenses, and they’re also a great way to invest alongside your other retirement accounts. With HSA contribution limits jumping to $3,550 for individuals and $7,100 for families in 2020, now is a great time to consider their many benefits.

Here are 5 of the best reasons why HSAs & retirement readiness go hand in hand. 

 

HSA Dollars Can Be Invested like a 401(k)

Unlike a Flexible Spending Account (FSA), deposits you make to an HSA don’t have to be withdrawn and used by the end of the year. In other words, the use-it or lose-it rules don’t apply.

In fact, your employees can invest and grow the money in their HSA just as they would a 401(k). 

If you don’t incur a lot of out-of-pocket health care expenses throughout the year, your contributions can potentially grow for decades into the future. This helps employees plan for a significant, long-term expense that often gets overlooked when thinking about retirement.

 

HSAs Offer Triple the Tax Benefits 

With 3 separate tax advantages, HSAs offer the greatest potential for tax savings compared to 401(k)s, Roth IRAs, and just about every retirement savings option out there.  

Here are 3 ways an HSA will reduce your tax bill: 

  • Contributions are pre-tax, helping you reduce your taxable income for the year.
  • Earnings and growth are tax-free while your HSA dollars are invested. 
  • Withdrawals are tax-free if used to reimburse any of the wide array of qualified medical expenses. 



Employees Will Be Better Prepared for Health Care Costs in Retirement

According to Fidelity Investments, the average couple is estimated to need $285,000 for medical expenses in retirement. That doesn’t even include inflation or the cost of long-term care. 

With such a likely and significant expense to plan for, it makes sense to utilize the best savings option. 

Thinking long-term with HSA dollars gives employees the future luxury of paying for expenses like prescriptions, office-visit copays, and long-term care with a tax-free pool of money.    

 

HSA Advantages Go Beyond Tax Savings

It’s not only the tax benefits that make HSAs an attractive choice. The flexibility of these accounts goes unmatched compared to other retirement savings options. 

Here are a few additional HSA advantages to know:

  • Choose to reimburse yourself now or later. As long as you keep receipts, you can wait years to reimburse yourself for qualified expenses after incurring them. This gives your invested dollars even more time to grow tax-free, waiting for the moment when you need them most.     
  • HSAs are completely portable. Even if there’s a change in employment status due to job loss, company change, or retirement, an HSA will follow you wherever you go because you are the account owner.  
       
  • HSA dollars can grow untouched well into retirement. Unlike 401(k)s and Traditional IRAs, there are no Required Minimum Distributions (RMDs) from these accounts beginning at age 70 ½. This offers a serious advantage since the need for high-priced health care services naturally increases as you age. 



HSAs are an Early-Retirement Tool  

Planning for an early retirement comes with its own set of challenges, like dealing with the awkward “gap years” of health insurance coverage. 

This is the period after leaving your employer’s health insurance plan, but before Medicare kicks in at age 65.  

Purchasing individual coverage is the most common solution, but premiums can be shockingly expensive compared to your employer’s plan.  

Here are some ways to plan for early retirement using an HSA:    

  • Contribute the maximum annual amount and invest your HSA dollars early in your career if possible. This gives your money plenty of time to grow leading up to early retirement, helping you prepare for unpredictable medical expenses without draining your 401k.
       
  • Wait to reimburse yourself for past medical expenses if you can afford to pay out of pocket now. This can provide tax-free income early in retirement from your HSA, which helps offset the higher cost of health insurance during these “gap years.” 

. . .

All in all, It’s worth taking the time to educate employees on the benefits of HSAs, along with other important financial wellness topics. If nothing else, it nudges them to consider all available health insurance offerings, rather than haphazardly deciding on their lunch break, the day before open enrollment closes. 

HSA accounts are only available to employees 18 years of age or older who are covered under a qualified High Deductible Health Plan (HDHP). Speak with a licensed professional to decide if the HDHP is right for you and your family. 

 

About the Author:

Anthony is a Financial Planner for LearnLux who works virtually with clients located all over the United States. He particularly enjoys working with Young Professionals who are navigating important financial decisions for the first time. His approach is to offer practical advice & education that helps people feel confident about tackling their financial goals. Anthony calls Chicago home. When he’s not working, he enjoys exploring the city’s unique neighborhoods by train, bike, or on foot.

Tags: financial wellness, HSA, financial advisors

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