When you’re starting out in the workforce, all the benefits options can feel overwhelming, especially when it comes to health care and saving for retirement. While retirement might feel far off, the decisions you make today will have an impact on your future. For example, a healthy, average couple age 65 who retired in 2020 will spend $662,156 on retirement health care expenses, according to estimates by HealthView Services.
So, how do you position yourself for financial security both now and in retirement? Health Savings Accounts (HSAs) could be a tool that can help.
What is an HSA?
HSAs are personal savings accounts that help you save on current health care expenses and those you’ll have in retirement. The key benefit is tax savings. HSAs are the only account you can put money into, gain interest on, and use to pay for IRS-qualified health care expenses, all tax-free. When combined with a high-deductible health plan (HDHP), HSAs offer savings and tax advantages that a traditional plan can’t duplicate.
Unlike other accounts, funds in your HSA stay with you no matter where you go in your career—if you’re furloughed, change jobs, or when you retire. The money you don’t use in your HSA rolls over from year-to-year, and after age 65, the funds can be used for any purpose without penalty (only income tax is assessed).
In addition to helping cover current out-of-pocket medical expenses and deductibles, the flexibility HSAs offer to save and invest funds for years to come can help you prepare for retirement. Health care is one of the largest expenses that you will face during retirement and it can be daunting. The 2020 HSA Bank Health & Wealth Index, which surveyed 2,000 U.S. adults, uncovered that 83% of consumers over 65 worried about current or future medical bills. Of those consumers, more than a third reported they rarely save money for future health care expenses. Using an HSA is the most tax-advantaged way to save and pay for future health care expenses and increasingly it is becoming an investment and retirement planning tool as well.
Yet many who could be taking advantage of an HSA aren’t. As of June 30, 2020, according to research conducted by Devenir, an estimated $73.5 billion was held in more than 29 million HSAs, but this only accounts for about 30% of employees who could be saving in an HSA.
How do you know if you‘re eligible for an HSA?
To open and contribute money to an HSA, you need to have a qualified high-deductible health plan (HDHP). Unlike traditional health plans, like preferred provider organizations (PPOs), HDHPs typically have lower monthly premiums. If you have a qualified HDHP, either through your employer, your spouse’s employer, or one you’ve purchased on your own, you can open an HSA. You can also find out more about your eligibility here.
Once you’ve determined if you’re eligible, the next step is to open an account. Often, employers will designate which provider you can open your account with, however not always. If it’s not clear from your health care plan where your HSA is held, you might be eligible to select your own provider. Talk with your human resources manager to find out more.
After opening your account, contributing and using your HSA is easy and convenient. HSA providers offer multiple ways to contribute to your new account such as direct payroll deductions, online transfers, or rollovers from an existing HSA. The Internal Revenue Service (IRS) sets yearly limits for how much money HSA account holders can contribute and these limits change each year.
Once you’ve made contributions to your HSA, you can use the account to pay for IRS-qualified health care expenses such as deductibles, coinsurance, prescriptions, vision, dental care, and more. For more information on what costs are eligible, the IRS offers a full list here. Starting from the establishment date of your HSA, you can also reimburse yourself for IRS-qualified medical expenses you paid for out-of-pocket.
Invest the funds saved in your HSA for retirement. Because HSAs are the only triple-tax advantaged account in existence, they have a significant advantage over traditional retirement options, which are subject to income tax when withdrawn.
This a huge opportunity for most people, especially when you’re early in your career and likely have fewer medical expenses than you will later in life. For example, HSA funds used to pay for medical expenses in retirement will be discounted at the tax rate other retirement funds are subject to. So hypothetically, given a 20% income-tax rate, using $1,000 from your HSA funds to pay for medical expenses in retirement would be equivalent to $1,200 from a 401(k). By maintaining enough funds in your HSA cash account to cover out-of-pocket expenses and your deductible, and investing the rest, you can ensure your money is working for your future and that unexpected medical bills won’t disrupt your retirement plans.
Even if you’re young and healthy, it’s crucial to take advantage of opportunities now that will best serve you during retirement. In summary, when deciding how to invest for retirement take into consideration the benefits of HSAs when making those saving and investing decisions, starting today.
Ed Seaver, senior vice president, director of relationship management, HSA Bank.