An HSA, the 'Other Retirement Account' with Mark Biller

Show Notes

A Health Savings Account can save you a lot of money now - and give you a healthier retirement income later. HSAs were designed to help folks struggling with out-of-pocket medical expenses. But a key provision makes them terrific “back up” retirement accounts, too. Rob West talks about that with Mark Biller. This is Faith and Finance - biblical wisdom for your financial decisions.

• We mention the benefits of Health Savings Accounts from time to time on the program, but today we’ll dive specifically into the connection they can have to retirement investing, which a lot of folks may not be aware of, right?

  • When you think about saving for retirement, you probably think about your workplace retirement plan or an IRA. But a Health Savings Account can also be a powerful retirement savings tool for some people. In fact, in certain situations an HSA can basically be thought of as a “super IRA.”

• Let’s start with a little background on HSAs.

  • To be eligible to fund an HSA, you have to have a high-deductible health plan, whether that plan is provided by your employer or purchased directly by you. This year, that means an individual plan with at least a $1,500 deductible, or a $3,000 deductible for a family plan.
  • If you have a high deductible plan like that, you’re basically self-insuring for routine and relatively minor medical expenses. So the government lets you contribute to a Health Savings Account so you have money on hand to pay those relatively minor health expenses, while insurance covers you against anything major.
  • That HSA money can be used to cover your deductible, co-pays, and a wide variety of health care products and services. HSAs have limits as to how much you can put in them each year — in 2023, the maximum contribution for an individual is $3,850, and the family max is $7,750. Like IRAs, “catch-up contributions” are also allowed for people age 55 or older.

• A lot of that actually does sound similar to an IRA.

  • Yes, and there are similar tax benefits available as well. Except in the case of HSAs, the tax treatment is potentially even better than IRAs, because they’re triple tax-advantaged: No taxes going in, no taxes on account growth, and no taxes if the money is withdrawn to pay “qualified health expenses.”
  • That’s why HSAs are sometimes referred to as “super IRAs” - because regular IRAs and other workplace retirement plans are only double tax-advantaged, meaning you pay taxes at one end with IRAs - either when the money goes in or when it comes out, depending on whether you’re using a Traditional IRA or a Roth. But HSAs give the tax benefit on both sides, making them unique.

• And it’s that triple tax advantage that makes HSA a potentially powerful tool for retirement investing, right?

  • Absolutely. The big key is whether a person can cover their out-of-pocket medical costs with funds outside their HSA account. If a person can do that, then the money that accumulates in their HSA gets that triple benefit as they invest it over the years.
  • Two important notes:
  • 1 - if you’re not sure if you can pay all your health expenses using non-HSA money, there’s no downside for trying. For example, say you decide to save the maximum in your HSA and you’re going to try to cover your minor health costs with non-HSA money. But if you end up having to dip into your HSA for half those costs, you’ve still got half that money sitting in likely the very best type of account for long-term investing.
  • 2- not all HSA custodians offer access to investments, but many do. At Fidelity, for example, money in Health Savings Accounts can be invested in any of the vast array of investments the company offers — mutual funds, exchange-traded funds, individual stocks, and more. Another popular HSA provider, Lively, offers access to Schwab’s investing platform. So having good investment options is fairly common.

• But one of the stipulations of that “triple advantage” is that HSA money has to ultimately be used to pay for qualified medical expenses, correct?

  • That’s correct. But there’s an important loophole that’s important for people who are using HSAs as long-term retirement savings accounts. Say you fund an HSA for a number of years and then retire. In retirement, you can take money out of the HSA for any new qualified health expenses you incur. But you can also reimburse yourself for qualified health care expenses that you incurred in the past.
  • That means that as long as you save your receipts for health care expenses that you pay out of pocket now, you’ll have the ability to take those amounts out of your HSA in retirement whether you have new health care expenses or not.
  • Here’s an example. Suppose that at age 66, you withdraw $15,000 from your HSA to buy a car (or any other non-health-related expense). As long as you have $15,000 in receipts for not-yet-claimed health expenses, even if you incurred those expenses years before, those receipts can be used to offset the entire withdrawal, effectively making it tax-free.

• That is a powerful benefit to be aware of. HSAs are different from Flexible Spending Accounts, correct?

  • HSA account balances can be carried forward year after year. That’s a key difference to Flexible Spending Accounts, where the money has to be spent each year or else it gets forfeited.
  • It’s also worth pointing out that once you enroll in Medicare (which typically happens at age 65), you’re no longer eligible to contribute to an HSA. However, any existing HSA balance you have can continue to be invested and used to pay for qualified health care expenses.

• We recently did a program on how important the so-called “order of operations” is for managing money. I suppose getting things in the right order applies here, too?

  • It does and SMI has always recommended prioritizing retirement savings this way: If your workplace plan offers a match, first contribute enough there to get the full match, then max out an IRA, taking advantage of its broader investment options. Then, if you still need or want to save more for retirement, go back to your 401(k) plan and contribute more there.
  • If your workplace plan doesn’t offer a match, max out an IRA first and then turn to your workplace plan.
  • But because the potential tax benefits of an HSA are so compelling, if you are eligible to fund an HSA and think you will be able to pay at least some of your health care expenses with non-HSA money so your HSA can grow over time, then we would recommend the following:
  • As before, if your workplace plan offers matching contributions, continue to start there, contributing enough to get the entire match. Then max out an HSA. Next, move on to funding an IRA. Finally, if you still want or need to save more for retirement, contribute more to your 401(k) plan.
  • If your workplace plan doesn’t offer a match, we’d actually suggest maxing out an HSA first. Then fund your IRA, and finally, turn to your workplace plan.

• Health care costs in retirement are always a major concern for folks. Medicare doesn’t cover everything. Give us an idea of how contributing to an HSA can alleviate some of those fears.

  • In the article "A Health Savings Account: The Other 'Retirement Account" we include a quote from a research firm that says, in most cases, “an individual who starts saving by age 40 can accumulate sufficient savings in an HSA to cover the cost of health care in retirement.”
  • The researchers said their projection would hold even if the individual used a small portion of his HSA money to cover current health expenses. It’s definitely a tool worth looking into if you’re covered by a high deductible insurance plan.

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