by Sarah Majeski, Team Leader of Client Services
When it comes to saving for retirement there are more options available than you may think. One way is through a Health Savings Account, or HSA. HSAs are quickly gaining popularity with estimated deposits for 2017 of $37.5 Billion dollars, according to HSA consulting firm Devenir. The tax-advantaged nature of HSAs can help you save for retirement by allowing you to save on taxes both, now and later.
Warning: Do not confuse HSAs with other health-related accounts like FSAs (Flexible Spending Accounts) and HRAs (Health Reimbursement Accounts) because they are very different. This article is about HSAs only.
So What Is It?
HSA is a tax-advantaged savings account for medical expenses, but we encourage plan sponsors and employees to also think of it as a special retirement account that they can contribute to when enrolled in a high-deductible health insurance plan (HDHP). HSA account holders can contribute pre-tax dollars to the account and then withdraw money, tax-free when paying for qualifying medical expenses!
In a HSA, you contribute pre-tax dollars like a 401(k)/403(b)/Traditional IRA (Individual Retirement Account) but still have the opportunity for tax-free growth AND tax-free distributions! That means potential triple tax savings when you spend the money on qualifying medical expenses AND you can take withdrawals whenever you want. The HSA account is owned by the employee, not the employer, which makes it portable and if the account owner is over age 65 the money is available for any purpose – without penalty.
Don’t See the Retirement Angle?
Although funds in a HSA are supposed to cover qualifying medical expenses, there’s no reason you have to use them anytime soon. Your contributions have the potential to grow tax-free for decades. It’s not a “use-it-or-lose-it” account. If you are fortunate enough to remain healthy during your working years and don’t incur a lot of medical expenses, you could build up a significant balance in your HSA. Also, there is no rule stating that you must withdraw money from your HSA account within a certain amount of time after paying for a medical expense. Rather, you can just take out the money whenever you want. As long as the qualified medical expense occurred after the HSA was funded, you can withdraw money anytime after incurring the expense to reimburse yourself.
Investing your HSA
As your savings begin to accumulate, you can invest them. Many HSA providers allow the account owner to invest their HSA account in mutual funds, similar to a retirement account, once a minimum account balance is reached. Every provider is different though, so we recommend reviewing the available investments and working with an adviser to determine what’s best for each employer and employee.
How Much Can You Contribute?
The 2018 maximum annual contribution limit for individuals is $3,450 and for those with family coverage, it is $6,900. These limits are reviewed annually by the IRS and adjusted for inflation as needed. Also, if you’re age 55 or older you can contribute an additional $1,000 “catch-up” contribution.
The Employer Side – HSA & Fiduciary
Despite an employer-sponsored HDHP being covered by ERISA, the Department of Labor (DOL) has ruled that an HSA is not subject to ERISA and is an individual health care savings tool. However, in light of the DOL’s new fiduciary rules, it is recommended that employers:
- Ensure that fees charged to participants within their programs are appropriate and fully disclosed;
- Review education and communication materials and practices to make sure they are appropriate and do not constitute advice and recommendations;
- Review and possibly change investment options within their products; and
- Review and possibly change new contracts or addendums with employers as a result of the above impacts.1
Interested in finding out how Oswald Financial can help you maximize saving for retirement? Reach out to us for a consultation!
1″DOL Fiduciary Standards: Potential Impact on HSAs” – HSA Bank
Withdrawals from an HSA account may be tax free, as long as they are considered qualified. Unqualified withdrawals prior to age 65 are subject to a 20% penalty and ordinary income tax. Future tax laws can change at any time and may impact the benefits of HSA accounts.
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. You should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
Securities and Retirement Plan Consulting Program advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC. Other advisory services offered through Oswald Financial, a separate entity from LPL Financial.