Health Savings Accounts – An Underused Retirement Resource
According to a 2013 study of employee retirement savings, healthcare concerns are driving many to cut retirement contributions, while seeking ways to save more for future healthcare costs. Mercer’s Workplace Study finds pre-retirees may cut back on retirement contributions by 10% in 2014 and due to a lack of trust in future healthcare benefits, these same workers may be putting those savings into Health Savings Accounts (HSA) combined with High Deductible Health Plans (HDHP) - plans with a minimum of a $1,250 deductible for individuals and $2,500 for families.
The study shows more employers are offering the High Deductible Health Plans, and more employees are taking them up on those plans which allow employees to establish HSA accounts that either they or their employer may put money into to pay for future health care costs. With the ongoing changes to health care, some pundits have speculated that trend is likely to continue to show strong growth in HSA accounts.
While employees may be making these moves due to concerns about future healthcare costs, they may actually be contributing to a better overall retirement savings plan than they realize. HSAs not only provide a vehicle to save for healthcare, but they have some significant retirement savings benefits over a traditional plan to only save to a 401(k), 403(b) or other employer-based plans.
HSA benefits include:
Savings can be used tax-free pre-retirement for qualified medical expenses for yourself, spouse or dependents even if they are not covered under the high deductible plan. Otherwise savings are tax-deferred until withdrawal and at age 65 will avoid a 20% penalty even if not used for medical expenses. The increased flexibility over IRA’s, 401(k)’s, and other retirement savings accounts shows why some savers may be shifting their contributions from traditional retirement vehicles. It is important to note that while there has been an increase in the coverage provided for children until age 26 under most health insurances, that HSA withdrawals only avoid penalties if used for children who are dependent, which can be a very difficult hurdle to clear for those whose kids are out of school or over the age of 24.
Employer contributions to your HSA may be tax-free, while your contributions receive a tax deduction. High income earners are often limited in how they can save on a pre-tax basis, and given the reductions and increases in phase-outs of many tax deductions, exemptions, and credits, even if you have to contribute a portion to your HSA, there are no income limits presently to receive a deduction. For 2014 the maximum contribution amounts for individual coverage is $3,300 for 2014 and for family coverage is $6,550. There is a catch-up contribution of $1,000 if the accountholder is age 55 or older. (Note – contributions are no longer allowed once you are enrolled in any Medicare plan).
Your current “excess” money that is being put towards premiums… you get to keep. One of the overlooked benefits of high-deductible plans with HSAs is that many rarely use the benefits of their insurance beyond annual check-ups or other visits. If you are allowed to direct your benefits in a cafeteria plan, the money currently being spent on insurance benefits you don’t use can go into an account for you rather than going to an insurer. It may take months or a few years of saving before you cover the deductible, but that money is yours to use as you need to.
You can invest this money as you see fit. Have a bad 401(k) plan? You’re out of luck. Have a bad HSA? You can transfer it to a better provider. Have a decent chunk of change in your HSA? You can invest it for longer-term growth. The options of what you can do with your HSA are not limited to the default plan your employer chooses for you unlike your 401(k), 403(b), or other retirement plan. Neither is your money is locked away; if you need to access it for any reason and it is worth paying tax and a 20% penalty, it is accessible to you.
It is important to understand that you are not eligible for an HSA if otherwise covered by insurance or any Medicare plan.
Is a HDHP / HSA strategy a fit for you? Although we can never know when a medical emergency may strike, if you are healthy, they may be worth considering. While the young are traditionally thought of as great candidates as they tend to consume less health care, many higher income earners as well as those who generally do not consume much in health care may also benefit from an HSA.
One of the unique social benefits of HSA plans is that they make us all acutely aware of the cost of the heath care that we consume. While many would prefer not to know what that cost is, controlling skyrocketing costs is one way to deal with the fear that is driving the move to HSAs to begin with! By paying for health care directly, at the consequence of spending limited HSA dollars, consumers may question more about their health care provider’s costs and recommendations. This simple process of becoming aware of cost and checking competitors prices encourages entrepreneurs to develop better delivery methods and makes the marketplace in general more efficient.