HSAs As Long-Term Savings Vehicles? We Say Yes.
HSAs As Long-Term Savings Vehicles? We Say Yes.
According to a recent PlanSponsor survey, many employers don’t see HSAs as a feasible long-term savings vehicle for employees. In response, here are a few reasons why HSAs are a critical piece of a comprehensive retirement strategy:
HSAs aren’t just for the young, healthy, and rich
A few survey respondents felt that HSAs were only viable long-term savings options for the young, healthy, and wealthy. While young, healthy people are certainly prime HSA candidates, they aren’t the only ones who can benefit from HSAs.
Often, HSAs get a bad rap because they must be paired with qualified consumer-driven health plans (CDHPs), which can have higher deductibles than other traditional health plans. However, those higher deductibles are often offset by savings in monthly premiums, as CDHPs tend to have lower premiums than traditional plans. In addition, HSAs’ unparalleled tax advantages also make a CDHP/HSA combination a financially savvy decision.
Medical expenses are a fact of life, regardless of your age or tax bracket. Knowing you’ll incur healthcare costs throughout your life, it makes sense to make sure you’re saving the most taxes as possible on those expenses. In addition, it also makes sense to put away tax-advantaged funds to pay for healthcare costs in retirement when you’ll likely be on a fixed income. HSAs are the solution to both issues.
HSAs give accountholders flexibility in how they use funds
In the survey, there were several comments around individuals needing their HSA dollars to pay for day-to-day medical expenses. Between mortgage/rent payments, childcare costs, student loans, car payments, and other daily living costs, it can be hard to think about adding another savings vehicle.
But that’s precisely why we like HSAs.
If an employee doesn’t know if they’ll be able to save money long-term, an HSA gives them flexibility to use funds for unexpected medical expenses and invest extra dollars for retirement. Unlike flexible spending accounts (FSAs), HSAs don’t have any use-it-or-lose-it limits, and unused funds roll over indefinitely. And unlike 401(k) plans, there’s no penalty for early fund withdrawals as long as it’s for a qualified medical expense.
For example, let’s say Kiara has been using her HSA to cover day-to-day medical expenses but decides to start paying out of pocket so she can invest her HSA funds. Things work well for six months, but then her daughter falls and breaks her arm, and Kiara needs HSA funds to pay for it. No problem! She can easily transfer her investment funds to cash and have access to her money to pay for those costs.
Also, as Kiara pays for healthcare costs out of pockets and keeps her receipts, she can reimburse herself from her HSA tax-free at any time. There’s no time limit for this, so she can let her HSA grow for years before making a tax-free withdrawal for reimbursement. Then, Kiara can use those tax-free funds however she wants; they don’t have to be spent on medical expenses.
HSAs are the best way to save for retirement
Several respondents noted that employees have enough trouble saving in their 401(k) plans and that asking them to contribute to HSAs as well is impractical. We would argue that, once employer matches are met, HSAs are superior savings vehicles than 401(k) plans and should be prioritized more highly. Here’s why:
- • Triple tax benefit. HSA contributions are tax deductible or pre-tax, earnings and interest grow tax-free, and withdrawals are also tax-free. Since funds in traditional 401(k) plans are taxed upon withdrawal, they can’t match HSAs’ tax savings.
This becomes extremely valuable when you look at the cost of healthcare expenses in retirement. According to a recent Healthview study, non-Medicare-covered retirement medical expenses can be up to $400,000 for a couple retiring at age 65 in 2018. If your only retirement vehicle is a 401(k), you could end up paying up to $134,000 more to cover those costs once taxes are factored in. However, if you have a mature investment HSA, you can pay for these expenses tax-free and save your 401(k) funds for other expenses.
- • FICA savings. When employees contribute to their HSAs via payroll withholding through their employers’ cafeteria plan, those contributions aren’t subject to FICA taxes (typically 7.65%). 401(k) plans don’t offer this benefit. By contributing to your HSA in this way, you get more money back in your paycheck than if you contributed to your 401(k)!
- • No tax penalty after 65. Before you turn 65, you have to pay a 20% tax penalty (in addition to regular income taxes) when using HSA funds for non-medical expenses. However, once you’re 65, the tax penalty disappears, and non-medical costs are only subject to income taxes, just like 401(k) withdrawals. This means HSAs basically become 401(k) plans in retirement, but with the huge additional benefit of tax-free withdrawals for qualified healthcare expenses.
HSAs aren’t just a tax-advantaged way to pay for current medical expenses; they’re powerful investment vehicles to help accountholders cover retirement healthcare costs. Have questions about how to best use your HSA? Contact us at support@HealthSavings.com or give us a call at (888) 354-0697; we’re happy to help. Or, if you’re ready to open your own account, you can sign up here.
We recommend consulting with a financial professional before implementing any changes to your retirement contribution plan.