There’s a Better Way to Use Your HSA That Too Many People Overlook

The health savings account market (HSA) is growing rapidly, but employees are missing a much bigger opportunity to contribute to their retirement by building savings for healthcare expenses for the long haul.

There was $82.2 billion in HSA assets held in more than 30 million accounts at the end of 2020, up 25% for assets and 6% for the number of accounts compared to the prior year, according to a Devenir HSA Market Survey. Devenir projects that the HSA market will exceed 36 million accounts holding more than $127 billion in assets by the end of 2023.

HSAs are still mainly known for their ability to offer tax-free healthcare expense coverage for those in high deductible healthcare plans. Managing current healthcare-related expenses using a tax-advantageous tool like an HSA is smart in the short term, but there’s a better way to use an HSA. HSAs can become a much more powerful saving tool in the long term, allowing Americans to plan for healthcare spending in retirement.

Why HSAs are So Popular

Healthcare remains the highest expense in retirement and the cost is only rising. Retirees and those planning for retirement certainly felt the pain of sticker shock when a recent study by Fidelity Investments revealed that an average 65-year-old couple who retired in 2021 will need about $300,000 to cover out-of-pocket healthcare costs in retirement. These costs include deductibles, copays and premiums, but they’re not even counting the possibility of needing full-time care in a nursing facility or with an at-home aide, which could add hundreds of thousands of dollars to the bill. It’s easy to see how healthcare expenses can quickly deplete retirement assets that were destined for other purposes.

Americans have to find alternative sources of income for retirement and HSAs can become central to better plan ahead and avoid the anxiety that can come with soaring healthcare expenses in retirement.

The key to long-term healthcare spending planning is first to contribute regularly to an HSA. Individuals who are enrolled in a high deductible healthcare plan and hence qualify for an HSA should make the maximum contributions, which in 2021 are set at $3,600 for people with individual coverage and $7,200 for those with family coverage. Individuals over 55 who are not yet enrolled in Medicare are able to make an additional $1,000 catch-up contribution.

How to Invest in an HSA

Another essential step in building healthcare savings for the long run is also to invest the balance of an HSA to allow the assets to grow on their own in addition to making regular contributions. HSA custodians have different options and investments with higher returns such as stocks and bonds should be favored over lower yielding investments such as certificates of deposit or money market funds.

The most important part of using an HSA as a long-term healthcare spending tool is to refrain from making withdrawals before retirement. It may sound counterintuitive to have an HSA and not use it for current healthcare expenses but it’s essential to grow the balance for when it will be needed the most.

This is especially attractive for account holders who have manageable current healthcare expenses. Individuals can use available cash to pay out of pocket for healthcare bills for the time being instead of their HSA. They can also borrow funds through a MedZero account, which allows employees to pay healthcare expenses over time at no interest, making it possible to truly use an HSA as a long-term savings account.

HSA holders who invest tend to have significantly higher balances than those who do not. Simply contributing the maximum amount of $3,600 a year for 25 years and investing it at an average rate of return of 3%, will secure a nest of nearly $140,000. By skipping investing an HSA, account holders are leaving increasingly large sums of money in cash accounts.

Using an HSA as a Savings Account

Another little-known boon is the ability to pay oneself back retroactively. In the improbable case that healthcare expenses in retirement end up being surprisingly lower than expected, the HSA balance can be used to pay for older qualified expenses as long as receipts were kept and they occured after the account was open. As such, the money saved for the long term will never be lost.

It’s easy to remember. Long-term planning for healthcare spending in retirement with an HSA comes down to three main actions: contributing the maximum amount allowed, investing the balance in high-yielding investments, and delaying HSA withdrawals. Such is the recipe to grow an HSA balance for when it will matter the most.

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