HSAs: Prescription for Retirement?

Health savings accounts (HSAs) are teenagers now — they’re 14 years old, in fact. And like most adolescents, they lend vigor and vitality; in this case, to individuals’ ability to care for themselves. And that includes during retirement. 

In ”A Closer Look at Health Savings Accounts: An Overlooked Retirement Savings Vehicle,” Michael Webb of Cammack Retirement points out how HSAs can be more than a way to help cover health-related expenses — they also can boost one’s ability to finance retirement. 

This is largely a well-kept secret, Webb posits. “You hardly ever hear HSAs brought up when discussing retirement plan savings,” he writes. But why? “Part of the reason for the lack of publicity in the retirement world has to do with the fact that HSAs were created for health plans,” explains Webb; still, he says, “Though designed in a health plan context, HSAs are quite a formidable option for retirement savings as well.”

Webb points out that HSAs can be a boon to retirees because: 

• HSAs can be tax-deferred, and really completely tax-free if used to pay for certain medical expenses; 
• HSA contributions are not taxed, their growth is not taxed, and distributions are not taxed;
• HSAs can be used for in-home nursing care;
• HSA funds can be used to pay for most other medical expenses, aside from over-the counter medications;
• HSA withdrawals for qualifying medical expenses are tax-free at any age, even for those who retire early; and
• healthy individuals can accumulate rather large balances in HSAs, and most can be invested in a manner similar to those employed for retirement plan funds. 

And HSAs resemble retirement plans as well, Webb points out. For instance, at age 65, HSA withdrawals for non-medical expenses are taxed just like withdrawals form retirement plans such as 401(k)s and 403(b)s. “Thus, HSAs are generally the same as a retirement plan with respect to withdrawals for any expense, except for the fact that the penalty-free withdrawal age is 65 rather than 59½, and the penalty is doubled (20%) in HSAs for withdrawals prior to age 65,” he says. “Essentially, HSAs are taxed like a retirement plan in retirement, with the added perk of triple-tax-free withdrawals for medical expenses at any age,” Webb adds. 

But, Webb adds, HSAs are not perfect. For example:

• they require enrollment in a high-deductible health plan, which not all employers offer;
• they can only be used to cover expenses incurred after the HSA was established;
• one cannot contribute to an HSA once enrolled in Medicare; and 
• they can be depleted fairly quickly if one is not healthy. 

Despite those shortcomings, says Webb, “You could certainly do worse for retirement than saving in an HSA (in particular, in comparison to, say, an IRA, though the contribution limits are slightly lower in an HSA), and such accounts should certainly be in the mix for consideration in your retirement planning.”