Ask Anne: Can an HSA help me save for retirement?

Anne encourages you to take a look at health savings accounts (HSAs), a new savings option from many employers, during this open benefits enrollment period.

It’s open season for benefits enrollment, which means it’s time to review your selections. While you might think of “retirement” and “healthcare” as two separate items on your checklist, many employers are offering a new savings option that addresses both: HSAs.

But because they’re relatively new, many people don’t know about HSAs—or don’t know enough about them. And that’s a shame, because they’re a great tool that could help many people.

With that in mind, here are the top FAQs I’ve gotten about HSAs and saving for retirement.

Q: I can’t keep these acronyms straight—what actually is an HSA?

In a nutshell, a Health Savings Account (HSA) lets you set aside money today for one of the biggest expenses most people will face in retirement: healthcare. In fact, research shows that a 65-year-old couple will need $270K to cover “typical” healthcare costs in retirement. And couples with above average medical needs could be looking at $325K in out-of-pocket expenses.

So, while you can always access the funds in the interim to cover medical costs that may pop up, you can also think of an HSA as a 401(k) for healthcare.

Q: I’ve heard of an FSA—how’s an HSA any different?

It’s all in the name. The “S” in HSA stands for saving, while FSA is short for Flexible Spending Account. And that sums up the main difference between them: HSAs are designed to help people grow their savings, while FSAs are more like a checking account you can draw down from.

I’d say the other key differences between HSAs and FSAs involve eligibility and timing.

If your employer offers one, then you can open an FSA—regardless of what type of health plan you choose. To get an HSA, however, you must be enrolled in a high-deductible health plan. Many employers now offer an HSA directly. But, even if your employer hasn’t added it to their benefits offering, you can still get one through your bank or another financial institution.

The other major difference between an FSA and an HSA is how long you have to use the money. While FSAs put strict limits on when you must use the money—generally it’s “use it, or lose it” within the year—HSAs let you roll over the money in your account from year to year.

Q: What are the tax advantages of having an HSA?

As long as they are used correctly, the money set aside in an HSA is considered “triple tax exempt,” meaning:

  1. Contributions are pre-tax: The money you contribute to your HSA comes out of your paycheck before taxes, including Medicare and Social Security taxes. The advantage there is that it decreases your taxable income. (Bonus point: You also have the flexibility to make post-tax contributions directly to the account, which you can deduct later, when filing your tax return.)
  2. Growth is tax-free: You won’t pay taxes on investment gains, and…
  3. Withdrawals are tax-free: When you take money out of the HSA, you don’t pay taxes on it—as long as you use the money to pay for qualified medical expenses.

These tax advantages, combined, make the HSA really stand out.

Q: So how does this help with retirement?

I mentioned above that one of the advantages of an HSA is that there’s no timer on when you have to spend the money. So you can spend as much as you need now, in five years—or, if you’re really savvy, you could let it grow tax-free over time and then use it to help fund medical expenses in retirement.

Once you reach a certain account balance (a threshold that’s set by your employer, usually around $1K-$2K), you can start investing subsequent contributions. This gives you the opportunity to generate even more retirement savings, in the form of investment returns.

When you think about it that way, an HSA is actually a great multi-purpose tool. You get the peace of mind of being able to use the money now, should you need it, but you can also reap the tax benefits and long-term growth of using it as a retirement savings tool.

Bonus question: What would you do?

Of course, I’d still prioritize contributing to my 401(k) plan, first, to maximize my company match. (Because nothing beats free money.)

And then I’d do some homework. An HSA is a great complement to a 401(k) to maximize your retirement savings, particularly since many employers will even contribute to your HSA. But healthcare is a very personal choice, and a lot of it will come down to whether you’re comfortable with a high-deductible plan—and the financial arrangement that comes with it.

Personally, I tend to stay in the same plan year-in and year-out. (Because who wants to spend too much time figuring this all out?) But then I ran the numbers. (Many employers offer calculators that are designed to help compare different healthcare plans. But, even if your employer doesn’t, you can always find one online.) I compared the premium and deductible for my current plan versus the high-deductible option, considering how often I think I’ll use the coverage. And then I factored in the value of both my and my employer’s contributions to my HSA.

For me, the anticipated savings from switching to a high-deductible plan plus the opportunity to save more for retirement has won me over. And I’ll be making the switch.

This open enrollment period, take the time to do the math yourself so you don’t miss out on another year of potential savings.

Anne Ackerley is the Head of BlackRock’s U.S. & Canada Defined Contribution (USDC) Group and a regular contributor to The Blog.

Investing involves risks, including possible loss of principal.

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