Health Savings Accounts (HSAs): The Rodney Dangerfield of Retirement Savings Plans
Show of hands out there (yes, I can see you!): How many have heard of Rodney Dangerfield? Hmm….tough crowd! For the uninitiated, he was one of the greatest comedians (at least to me) when I was growing up and his entire live act centered around jokes about the fact that no one respected him.
Well, I feel similarly about Health Savings Accounts (HSAs) as a retirement plan savings vehicle. In the past, they have rarely been discussed as a vehicle for retirement savings. However, that is beginning to change, as evidenced by the discussion at the recent Redbook/MFS “A Time For You” event, featuring my colleague, Emily Wrightson.
The lack of publicity in the retirement space has to do with the fact that HSAs were created for health plans. HSAs were designed to be a method by which to save money for medical expenses in high-deductible health plans, where individuals pay more medical expenses out of pocket, and thus benefit from a vehicle to save for those out-of-pocket expenses.
While designed in a health plan context, these plans can be a formidable option for retirement savings as well. Here’s why:
- HSAs can be triple tax-free — That’s right, HSAs are not only tax-deferred, but completely tax-free when used to pay for certain medical expenses. In these instances, the HSA contribution is not taxed, the growth is not taxed, and the distribution is not taxed! And the better news is that the types of medical expenses that can be paid is liberal, particularly for retirees. For example, the retiree’s Medicare premiums can be paid tax-free from an HSA (although not Medicare supplemental insurance premiums), as can premiums for long-term care insurance and COBRA coverage. Oddly, over-the-counter medications are not covered, but most other medical expenses are.
- At age 65, HSA withdrawals for non-medical expenses are taxed just like they would be in a traditional retirement plan — These withdrawals are taxed as ordinary income, just like in a retirement plan such as a 401(k) or 403(b). Thus, with respect to withdrawals, HSAs are generally the same as retirement plans for any expense, except for the fact that the penalty-free withdrawal age is 65 rather than 59½, and the HSA penalty is double (20%) for withdrawals prior to age 65. But, keep in mind, withdrawals for qualifying medical expenses are tax-free at any age, so even someone who retires early can use his/her HSA for this purpose. Essentially, HSAs are taxed like a retirement plan in retirement, with the added perk of triple tax-free withdrawals for medical expenses at any age.
Now, there are some drawbacks of HSAs. First, an individual must be enrolled in a high-deductible health plan (HDHP). Secondly, due to the relatively low contribution limits ($3,450 for individual health coverage and $6,900 for family coverage in 2018), people who are not in relatively good health may spend the savings on medical expenses. But for those in good health, the money saved can be invested similarly to that in a retirement plan and accumulate over time. HSAs should certainly be considered as a part of a retirement savings plan.
Note: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
Investment products available through Cammack LaRhette Brokerage, Inc.
Investment advisory services available through Cammack LaRhette Advisors, LLC.
Both located at 100 William Street, Suite 215, Wellesley, MA 02481 | p 781-237-2291