Health Savings Accounts as Retirement Benefit

Health Savings Accounts as Retirement Benefit

by Mary Suplee on Dec 5, 2018

Health Savings Accounts (HSA) are becoming more and more popular options with many providers of defined contribution plans such as 401(k)s. I have seen estimates that the amount of money in health savings accounts has increased by 45% over the last two years and should reach over $70 billion by the end of 2020.

There are two basic strategies people use in these accounts. The first is the stated purpose - to use pretax dollars to pay for medical expenses. Put money into this account and every payroll where you needed to pay your doctors' bills or co-pays, you take the money out and use it for that purpose. That was the original intent of these accounts. What seems to be the more popular use of them now is as an additional super IRA that can be used for health spending in retirement.

Health Savings Accounts allow the owner to do asset allocations just like an IRA and amass tax-free compounding over the years. Some people view this as money for supplemental spending in retirement; some view it as a standby source of funds for long-term care if that becomes necessary. For most clients, I favor the use of HSAs as a super IRA.

HSAs have unique characteristics unlike other retirement savings vehicles. First, they allow tax deductible savings. Second, they allow tax-free growth in a qualified account. Thirdly, they allow tax-free distributions if used to pay for qualified medical expenses. Got that? Triple tax-free. If you have the option to use an HSA at work, I highly recommend it. If you can afford it, you maximize as much as possible in your HSA and pay for your regular medical expenses out-of-pocket while allowing this to grow for the future.

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