Health savings accounts gain acceptance as retirement tool
J Thoendell stashed this in Personal Finance
HSAs have only been around for about a decade, so even the earliest adopters aren’t ready for retirement in great numbers. Yet research suggests that HSA holders aren’t thinking of their account as the long-term, retirement savings vehicle that it could be. Only 16% of employees who are contributing to a health savings account plan to use the funds for future healthcare costs in retirement, according to the 2015 Employee Financial Wellness Survey by PwC.
What’s more, less than 5% of all account holders have invested their HSA in mutual funds or other securities. The vast majority of accounts are in cash equivalents, which imply a more short-term focus, according to Devenir. “People just don’t appreciate the full benefit of HSAs at retirement,” said John DiVito, president of Flexible Benefit Service Corporation, a Rosemont, Ill.-based benefits administrator.
The big benefit of HSAs is one that even the 401(k) can’t match: a triple tax advantage. Money in HSAs isn’t taxed on the way in, it grows on a tax-deferred basis, and it can be withdrawn tax-free to pay for qualifying medical expenses—now or in retirement.
For 2015, the IRS allows HSA contributions of up to $3,350 for an individual and $6,650 for a family. Those 55 and over can add an additional $1,000 in “catch-up contributions.” As with an IRA, account holders have until April 15 to contribute to their HSA and realize tax savings in the prior year.
The small subset of HSA holders who max out their accounts each year tend to be high earners, DiVito said. They see the account as another retirement savings vehicle, and their high tax bracket means they especially can benefit from the savings at tax time when their HSA contributions are excluded from their annual income.
Instead of tapping their HSA for medical expenses, these people pay their medical bills with after-tax dollars until they reach their deductible. Eric Remjeske, president and co-founder of Devenir and himself an HSA holder, has found doctors and other providers readily agree to charge his credit card a fixed monthly amount until his bill is paid off, without interest or other fees. Not only does this break the bill into manageable monthly chunks, but it also allows him to earn rewards points on his card.
I have one, but it is one of the hardest "desk job" investment vehicles to understand and manage.
I once had a chat with a very well-educated and sophisticated friend in the healthcare business, who said that if we could get every young person to just choose high-deductible plans and max out their HSA contributions we wouldn't need Obamacare. That is the moment when I realized... we need Obamacare.
With or without Obamacare I can't tell if it's good advice to max out their HSA contributions if they can.