Using A Health Savings Account for Retirement

Author

Grant Ameel

Weighing the Pros & Cons...

Gain some perspective on the ol' HSA...

To most people, saving up for retirement means managing their employer-matched 401(k) or IRA plan. What they might not be aware of is the trending use of HSAs as an alternative retirement savings account. 

A HSA (Health Savings Account) is a tax advantaged savings account that was introduced to help people with high deductible plans pay for out-of-pocket medical expenses. However, due to the triple tax advantage nature of HSAs – all contributions are pre-tax/tax deductible, all returns on earnings, interest, and investments are tax-free, and all withdraws for qualified medical expenses are tax-free – they have transformed into something more than just a medical expense account. So much so that experts have even advised that some people would be better off using their HSA contributions as their primary retirement savings vehicle and their traditional 401(K) as a secondary option. What also makes a health savings account more desirable then per say a FSA or a HRA, is that it is owned by the employee and not the employer and is therefore portable. That means that if an employee terminates or gets a different job they can take their HSA with them.

Of course there are some drawbacks to using a HSA as a retirement fund. Above all, one must first have a medical plan that actually qualifies for a HSA. Said plan must be a High Deductible Health Plan (HDHP) with Minimum Required Deductibles established annually by the IRS. The minimum required deductible in 2017 will be the same as it was in 2016; $1,300 for self-only coverage and $2,600 for family coverage. Secondly, for anyone planning to use their health savings account primarily as a retirement savings vehicle they need to treat it as such. That means making the maximum yearly contribution ($3,400 for self, $6,750 for family in 2017) each year with no, or at least minimal, withdraws. As previously mentioned, withdraws from an HSA are tax-free for qualified medical expenses, but withdraws for non-medical expenses before the age of 65 are subject to a 20% penalty.  Ideally out-of-pocket medical expenses should be just that - paid out of pocket - for those intending to use their HSA for retirement.  Meaning, if possible, the HSA owner would either need to be fairly healthy pre-retirement, or financially capable of paying their medical expenses out of pocket without tapping into their HSA. That’s easier said than done for a lot of people. The reality is, since they’re conjoined with a HDHP, a large portion of Health Savings Accounts will ultimately have to be significantly utilized for medical expenses or COBRA premiums during their owner’s working years, making it hard to save for retirement.

With all that being said, you might be asking yourself, “Is trying to use my health savings account for a retirement savings account even worth it?” Well, the unassuming answer is yes, it is. Regardless of whether or not you have the capability to make it your primary retirement savings account or just a secondary savings account, the bottom line is that when it comes to saving for retirement the HSA is really the “Holy Grail” when it comes to tax breaks. No other retirement plan has the triple tax advantage that a HSA offers.

Again, just to reiterate, all contributions are tax deductible, all earnings are tax-free, and if any medical emergencies do arise pre-retirement, there are no penalties when pulling money out for medical expenses.  To put it simply, if managed correctly, using your health savings account to save for retirement could pay huge dividends in the long run and it should certainly be considered when planning your retirement strategy.

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