HSAs can help employees save for retirement

5 ways HSAs can help employees save for retirement

November 21, 2019 2:45 PM

With open enrollment in full swing, it’s time for your employees to review their health insurance options. Many workers will check the same box as last year, leaving their health insurance unchanged for another 12 months. But by making this quick, uninformed decision, employees are potentially missing out on a powerful retirement savings tool.

Health savings accounts are one way employees can save for retirement because they offer a tax-advantaged way to set aside money for qualified medical expenses. They’re also a great way to invest alongside other retirement accounts. With HSA contribution limits jumping to $3,550 for individuals and $7,100 for families in 2020, now is the time to consider their many benefits.

HSA dollars can be invested like a 401(k)

Unlike a flexible spending account, deposits into an HSA don’t have to be withdrawn and used by the end of the year. The use-it or lose-it rules do not apply. Employees can invest and grow the money in their HSA just as they would a 401(k). If you don’t incur a lot of out-of-pocket healthcare expenses throughout the year, contributions can potentially grow for decades into the future. This helps employees plan for a significant, long-term expense that often gets overlooked when thinking about retirement.

HSAs offer triple the tax benefits

With three separate tax advantages, HSAs offer the greatest potential for tax savings compared to 401(k)s, Roth IRAs and just about every retirement savings option.

Employees can make contributions pre-tax, which helps to reduce taxable income for the year. Earnings and growth are tax-free while HSA dollars are invested and withdrawals are tax-free if used to reimburse any qualified medical expenses.

Employees will be better prepared for healthcare costs in retirement

The average couple is estimated to need $285,000 for medical expenses in retirement, according to data from Fidelity Investments. That doesn’t include inflation or the cost of long-term care. With such significant expenses, it makes sense to use the best savings option. HSA dollars give employees the future luxury of paying for expenses like prescriptions, office-visit copays and long-term care with a tax-free pool of money.

Advantages go beyond tax savings

It’s not only the tax benefits that make HSAs an attractive choice. The flexibility of these accounts goes unmatched compared with other retirement savings options.

Employees can choose to reimburse themselves now or later. As long as they keep receipts, they can wait years to reimburse themselves for qualified expenses. This gives invested dollars even more time to grow tax-free, waiting for the moment when you need them most.

HSAs are also completely portable. Even if there’s a change in employment status an HSA follows the account owner wherever they go. This money will go untouched well into retirement because there is no required minimum distribution on these accounts beginning at age 70 and a half. This offers a serious advantage since workers need high-priced healthcare services as they age.

HSAs are a tool for early retirement

Planning for an early retirement comes with its own set of challenges, such as dealing with the awkward gap year of health insurance coverage. This is the period before Medicare, but after leaving an employer sponsored retirement plan. Purchasing individual coverage is the most common solution, but premiums can be shockingly expensive.

HSAs can help because employees can contribute the maximum annual amount and invest HSA dollars early in their careers. This gives money plenty of time to grow leading up to early retirement, helping workers prepare for unpredictable medical expenses without draining their 401(k).

Employees can wait to reimburse themselves for past medical expenses if they can’t afford to pay out of pocket now. This provides tax-free income early in retirement for their HSA, which helps offset the higher cost of health insurance during these gap years.