H.S.A. Spells Retirement!
About six years ago, when I received one of my Health Savings Account (HSA) statements, I realized this is more than just a health benefit. By no means was the balance enough to fund an early retirement at this point; however, I had amassed a balance that was big enough to catch my attention.
In all transparency, I wish I could state that the reason I had accumulated some wealth within my HSA was due to a disciplined approach to self-funding our family’s medical needs. Unfortunately, the true reason was that I had misplaced my HSA “debit” card and was too consumed in other aspects of life to find the time to order a new one. It’s somewhat ironic, but thanks to apathy, I looked at my HSA as another retirement vehicle for the first time! This HSA retirement revelation has forever changed my view on HSAs and how we, the industry professionals, need to position HSAs with its end-users, both employers as well as employees.
Outside of the recent buzz around HSAs, traditional HSA messaging has been centered on using the money to ease the burden of high deductibles and today’s medical expenses. Very little focus was on retirement and the impact that a “simple swipe” of an HSA debit card could have long-term.
Let’s take a step back and face the facts. There are very few givens in life but I’m confident enough to state that the likelihood of healthcare costs continuing to increase is very high. Per the Employee Benefit Research Institute (EBRI)¹, a couple retiring in 2016 with median prescription drug costs would need to have approximately $265,000 saved to cover healthcare expenses in retirement. To check out what your future healthcare cost may be, you can use Fidelity’s Retiree Health Care Cost Estimate.
Clearly these are no small numbers and this expense can put significant pressure on a retiree’s income. So, what can be done to better prepare for this future expense? If afforded the opportunity to participate in an HSA, treat the HSA more like a savings account and think of it as a medical 401(k)/403(b) plan. In other words:
- Contribute to the HSA just like you would do a traditional retirement plan
- Avoid spending HSA money on smaller medical expenses to allow accumulation to occur
- Consider investing a portion of the HSA balance for growth potential (Please note that HSA providers have different rules and investment options to choose from – check with your HSA provider for more information)
Following the three tips above can help your HSA grow to a potentially significant balance over time. This money can then be used to fund future medical expenses tax-free in retirement, when healthcare costs will likely be highest for the average consumer. Having this added pool of money to draw from allows traditional retirement savings accounts (such as a 401(k), 403(b) or IRA balances) to be used for other, non-medical purposes.
What makes the HSA such a powerful retirement tool is that it’s unlike any other retirement vehicle. It offers participants a triple-tax advantage²:
- Contributions made to the HSA are on a pre-tax basis, and if you contribute through payroll deduction, that contribution is excluded from FICA taxes
- Contributions that accumulate in the account have the potential to grow tax-deferred
- Withdrawals for qualified medical expenses are tax-free
In the fortunate event that your HSA balance is higher than what medical costs turn out to be, retirees can use HSA money for non-medical purposes, taxed as ordinary income, after age 65. Essentially, at age 65, for any non-medical distribution, your HSA is treated no different than your 401k, 403b or IRA.
Thanks to a bit of apathy six years ago, I’ve taken a completely different stance on HSAs and now think of them for what they are, health savings accounts rather than health spending accounts!
¹ Employee Benefit Research Institute (EBRI), Jan 31st, 2017; Vol. 38, No. 1 – EBRI Notes
² In AL, CA, & NJ, eligible HSA contributions are subject to state tax. In NH & TN, earnings, not contributions, are subject to state tax.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Assurance Financial Services, Ltd and Assurance Agency, Ltd are not affiliated with Kestra IS or Kestra AS. Assurance Financial Services, Ltd is a wholly owned subsidiary of Assurance Agency, Ltd.
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