Using HSAs as a Retirement Planning Tool

November 08, 2018

Health Savings Accounts, often called HSAs, have become a popular complement to high-deductible health plans. While HSAs do work well to counter the risk of high out-of-pocket costs that comes with these plans, they have another great use as well. HSAs can be used as retirement planning tools.

The Retirement Crisis

According to a survey from Bankrate, 20 percent of Americans are not putting aside any savings each year. Even among those who do manage to set something aside, the amount is often meager. As a result, many people lack emergency funds, and around half of Americans can expect a reduced standard of living during retirement.  

Of course, it’s hard to save money for the future when you’re worried about the present. Rising health care costs, in particular, are a major concern for many Americans. Many people may feel that they have to choose between addressing health care costs and retirement planning – but with HSAs, they can do both at the same time.

How HSAs Work

HSAs are available to people enrolled in high-deductible health plans. These plans typically come with relatively low premiums, making them appealing to healthy individuals and families trying to cut costs. If a medical emergency occurs, however, the high deductible can become a big problem. HSAs are designed to address this issue, by helping people save in case expensive health problems arise.

If no medical emergency occurs, HSA owners get to keep their money. In this way, HSAs are different from FSAs, since the money in an FSA expires at the end of the year. The money in an HSA remains available until it is spent. It’s also portable, so people don’t have to worry about what happens if they quit their job or get fired. The HSA goes with them.

This means a 20-year-old could open an account now and use it decades later during retirement, while still having funds readily available should a medical emergency arise.

What If You Don’t Have a High-Deductible Health Plan?

If you’re not enrolled in a high-deducible health plan, you’re not eligible for an HSA. However, if you already have an HSA and you switch to a health plan with a lower deductible, you don’t lose your funds, although you’re no longer allowed to make contributions.

This can happen when people switch jobs or change their health plan selection. It also happens when people enroll in Medicare. Medicare is not a high-deductible health plan, so enrollees are not allowed to continue making contributions to their HSAs. It’s important to be aware of this, but remember that you don’t lose your funds.

The Tax Advantages of HSAs

It’s already easy to see how HSAs can be used in retirement planning, but the main appeal lies in the tax advantages of HSAs. HSAs have what is often called a triple tax advantage:

  • You don’t pay income tax on your contributions, which are often made as pre-tax payroll deductions.
  • Your funds earn interest, and you don’t pay tax on this.
  • You don’t pay tax on withdrawals that are made for eligible medical expenses.

You can use HSA funds for other expenses, but you’ll owe taxes if you do so.

Many retirees may find that they need every penny of their HSA to cover the high cost of health care. According to estimates from Fidelity, the average couple can expect to spend $280,000 on health care costs during retirement. HSAs can also be used to pay for long-term care expenses, including premiums for long-term care insurance, without incurring a penalty. 

If you’d like to learn more information about offering HSAs as part of your company’s employee benefits package, or setting up an HSA for yourself, please contact Heffernan Insurance.