Don’t Forget About that HSA Option During Open Enrollment! (Article)

September 14, 2020
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Don’t Forget About that HSA Option During Open Enrollment!

Health Savings Accounts, or HSAs, were first introduced in 2004 and although they are not always advertised as such, are a great retirement savings vehicle! Especially for younger workers. The reason? Triple tax benefits! Here is how it works:

  • Contributions go into the account tax-free
  • Earnings grow tax-free
  • Distributions are tax-free for qualified medical expenses!

Now, there a few items to be aware of with these accounts:

  • The way you gain access to an HSA is through a high-deductible health plan (HDHP). Whether or not that plan is the right fit is a personal decision, but generally, healthy individuals and families are good candidates for these plans. You’ll want to speak to your human resources department to learn more.
  • You will need to contribute money to your HSA (your employer may too!) and then not use it! That’s right – in order to use this account for retirement savings, you won’t be accessing the money at all, even though you are allowed to. You will want to pay for most of your medical expenses out of pocket and SAVE THOSE RECEIPTS AND INVOICES!
  • For distributions to be tax-free in retirement, they need to be for qualified medical expenses. Those receipts or invoices, regardless of date, can be used to withdraw funds any time without tax liability. The goal is for that to be during your retirement years.
  • Your account will have an investment threshold. Once you have attained a certain balance in the account ($2,000 or $5,000, for example) you can then invest the funds. Each provider is different so review the plan’s documentation carefully, but you may even be able to replicate the investments you have currently in your 401(k) plan! Pay attention to the fees on those investments too!
  • The maximum annual contribution is relatively low compared to retirement plans ($3,550 for an individual, $7,100 for a family; $1,000 catch up is allowed for those over 55), but that is why this is a great option for young workers. Plenty of time to build up a significant balance!
  • Further support for an HSA is a recent Fidelity study* that estimates an average 65-year old couple will need almost $300,000 for medical expenses during retirement! Using tax-free dollars from an HSA account to cover those expenses is significantly preferable to withdrawing money from another retirement account with tax repercussions!
  • Note: If you do use the funds for non-medical reasons, you will not incur a tax penalty if you are 65 or older. However, you will owe income taxes on that amount.

*https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs

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