HSAs: The New Retirement Plan
Health Savings Accounts (“HSAs”) are becoming the most flexible option in retirement planning. As a refresher, HSAs are individually owned bank accounts that are a tax-advantage option for anyone enrolled in a qualifying High Deductible Health Plan. This can be an individual plan or a plan through an employer.
HSAs are primarily known for allowing individuals to be reimbursed tax-free for out-of-pocket medical, dental, or vision expenses incurred by themselves or their spouses and dependents. However, in addition, they can add an option for retirement funding similar to the benefits of a 401(k), 403(b), or IRA. Not only are contributions tax-free, but HSAs have the additional tax advantage that all eligible distributions (for eligible expenses) are also tax-free. The result: money goes into the account tax-free, grows tax-free, and is distributed tax-free. None of the traditional plans allow for all three steps. HSAs have been described as “Roth IRAs for health expenses . . . only better.”
For employers, including the HSA bank account option as a benefit offering allows employees the flexibility of these options: (1) use tax-free dollars now to pay for health expenses; (2) use tax-free dollars now to pay for health expenses, and also save and grow funds tax-free for future expenses or retirement health expenses or income; or (3) save all expenses for future or retirement health expenses or income. With the high annual contribution maximums ($3,500 for individual coverage and $7,000 for family coverage in 2019, not including catch-up contributions allowed for individuals 55 and over), substantial funds can be sheltered or saved. For those who choose to invest their funds, current expense receipts can be “shoeboxed” for future distribution tax-free after years of growth. There is no shortage of eligible expenses for future reimbursement, including not only deductible and coinsurance expenses through the years, but also every day expenses such as band aids, prescription drugs, sunscreen, contact lens and glasses, and many others.
HSAs are not new (created in 2004), but their popularity and use continue to grow. There are currently more than 20 million HSA bank accounts held by American employees or individuals, and given the substantial tax and other advantages, they will be a tremendous option for us all for years to come.