The HSA as Another Retirement Plan Option

Financial advisers can help their clients use HSAs as an additional retirement savings vehicle.
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Health savings accounts (HSAs) allow account holders to set aside money on a pre-tax basis to cover qualified medical expenses. Unlike a flexible spending account (FSA), HSAs allow account holders to carry unused money in the account from year-to-year.

For employees going through the annual open enrollment period for their benefits with their employer, this can be a good time for financial advisers to help them get started with an HSA.

HSAs are only available in conjunction with a high-deductible health insurance plan. Those who are self-employed can also take advantage of an HSA as long they do so in conjunction with a high-deductible health insurance plan.

High-deductible health plans are those with a minimum deductible of $1,400 for a single person and $2,800 for a family for both 2020 and 2021. The out-of-pocket maximums are $6,900 for a single person and $13,800 for a family for 2020. These limits increase slightly for 2021 to $7,000 and $14,000, respectively.

The maximum contributions to an HSA are $3,550 for an individual and $7,100 for a family for 2020. These levels increase slightly for 2021 to $3,600 and $7,200, respectively.

For those who are age 55 or older an additional $1,000 can be contributed to the plan.

All contributions are made on a pre-tax basis.

HSAs as Another Retirement Resource

HSAs were designed as a medical savings account allowing account holders to contribute on a pre-tax basis and withdraw funds tax-free to pay for qualified medical expenses. They are a great vehicle for their intended purpose, but their characteristics can make them an even better retirement savings vehicle for your clients.

HSAs offer a triple-tax advantage: Money is contributed on a pre-tax basis, money in the account grows tax-free and withdrawals to cover qualified expenses are made on a tax-free basis. 

Additionally, most HSA accounts offer a menu of investment options similar to a 401(k), and some offer the option to move the money over to an HSA account at an outside custodian with a wider range of investment options.

For clients who can cover their out-of-pocket medical expenses from other sources while they are working, the fact that the HSA funds can be carried over allows this money to be able to accumulate to cover healthcare costs when your clients retire.

Having a retirement account to help cover healthcare costs in retirement can help your clients deal with the rising cost of healthcare.

Fidelity Investment’s most recent study pegged the cost of healthcare in retirement at $295,000 for a hypothetical couple each aged 65 in retirement. This doesn’t even take any long-term care costs into account.

Another consideration is that an HSA can be used to help supplement medical expenses for clients who might retire early, whether voluntarily or involuntarily. Some early retirement packages might include continued healthcare, others may not.

While an HSA account can’t generally be used to cover health insurance premiums, exceptions to this include those who are collecting unemployment compensation and those who opt into COBRA coverage from their former employer. HSA funds can be used to cover expenses that might not be covered by your client’s insurance during this gap period between leaving their job and the start of Medicare coverage.

Beyond covering medical expenses, any HSA money not used by your clients for these expenses can act like another traditional IRA account after they reach age 65. The money in the account can remain invested tax-deferred but will be taxed at ordinary income tax rates just like an IRA account.

Note that once your clients begin taking Medicare they can no longer contribute additional funds to their HSA account.

Qualified Expenses

The list of qualified expenses covers a wide range of medical and related expenses including many that pertain directly to retirees and retirement. These include:

Additionally, HSA money can be used to cover some or all of any copays or deductibles that they might incur once they are covered by Medicare.

Other examples of qualified expenses include:

  • Dental care
  • Vision exams
  • Hearing aids
  • Insulin
  • Many over-the-counter medications

For those who have access to an HSA, they can serve as an additional retirement savings account. They offer a current-year tax break, tax-free growth and a pool of funds to help cover the increasing costs of healthcare in retirement.