Health Savings Acounts for Health and Wealth
By Linda Robertson, CFP, AFC, ChFC
(Our guest blogger, Linda Robertson, is a financial planner with Financial Finesse. Her firm will present an audioconference on Oct. 27, The New Benefits Planning That is Reducing Employers’ Legal Liabilities.)
Can the health savings account (HSA) double as a retirement account? In some ways it can, and no one is talking about it. Why? We tend to look at things from our own perspective. It is natural for employers to look at it through a health benefits angle and financial advisors who manage money tend to look at it from an investment point of view. As financial educators, we look at benefits from the financial planning point of view. We are looking at how employees can maximize all of their benefits not just ones we manage (because we don’t manage any).
Here is an example of how the HSA can serve two purposes:
I recently sat down with a 38-year-old woman who was worried she wasn’t saving enough for retirement. After running a retirement projection together based on her salary deferral to her 401(k), I unfortunately had to confirm her concern. She needed to save about 5 percent more than her current 6 percent to get her to where she needed to be.
We started talking about where she could come up with the extra savings, and she then mentioned she was maxing out her HSA, but was thinking about lowering her deferral during the next open enrollment. Since she was putting almost $3,000 a year in her HSA and she only had an $1,800 deductible, I decided to count the excess as a supplement to her current 401(k). The amount she was contributing to her HSA was pretty close to what I would have recommended as an increase to her 401(k). Why would she want to do that?
There are reasons why it might be beneficial for an employee to retire with a large balance in an HSA.
• You can use it tax-free for many qualified medical expenses, like long-term-care insurance premiums or even remodeling her home to be more wheelchair-friendly, if necessary. As we get older, we have more medical expenses so it would be beneficial to be able to pay for them tax free.
• There is some flexibility if you don’t have high medical expenses. After age 65, you can withdraw funds for any reason without any penalty — the funds are taxable however since not used for medical purposes. This would be similar, however, to the pre-tax 401(k).
• In many cases, you can match any HSA withdrawal to a medical cost and pay NO taxes. The funds come out of your check pre-tax and are withdrawn tax free in this case. There is a benefit not found anywhere else. Think about it – the Roth 401(k) doesn’t have the pre-tax feature but has the tax-free withdrawals. The pre-tax 401(k) has the tax break in the current year, but the funds are taxable at retirement. The HSA is pre-tax now and tax-free when withdrawn for medical expenses (which she may have a lot of in retirement.)
Can you imagine the look on the face of the employee when she connected the dots? Can you imagine how grateful your employee base will be when they truly understand how to make the most of their benefits? Her employer had given her the flexibility of using the HSA not only for medical expenses today, but to help her pad her nest egg for the future!
Can you imagine how appreciative she was of her employer? So the HSA is not just to be healthy but also wealthy — if employees use it wisely.