For years, we have been suggesting to many of our clients that HSAs (Health Savings Accounts) frequently offer more benefits and flexibility than pension plans such as IRA’s. This article from the WSJ appears to agree with that.
We are obviously not suggesting that you replace pension plans with HSAs, but in many instances, you may want to contribute to an HSA before a pension plan, or use the HSA to increase your tax-sheltered contribution limits.
I welcome your comments.
Sincerely,
Phil Lee
Philip W Lee, Lee Health Insurance Services www.health-insurance.com 800-286-7445
Wall Street Journal, Jan. 29, 2016:
HSAs Offer Tax Benefits Beyond 401(k)s
Health-savings accounts can be used to cover medical costs, a major expense, in retirement
Most people overlook health-savings accounts, or HSAs, as a retirement-savings vehicle. A SeniorsPLUS networks representative talks with a Bangor Savings Bank official in Maine. PHOTO: GORDON CHIBROSKI/PORTLAND PRESS HERALD/GETTY IMAGES
By
ANNE TERGESEN
January 29, 2016
When saving for retirement, there is a place to put money that may be even better than your 401(k).
Most people overlook health-savings accounts, or HSAs, as a retirement-savings vehicle. But these accounts, which were authorized in 2003, come with more tax advantages than 401(k)s and individual retirement accounts when used to cover medical costs, which are a major expense in retirement.
“It’s the most tax-preferred account available,” says Michael Kitces, director of financial planning at Pinnacle Advisory Group Inc. in Columbia, Md. “Using one to save for retirement medical expenses is a better strategy than using retirement accounts” to cover those expenses, he says.
As with a traditional 401(k) or IRA, an HSA allows you to set aside pretax money without paying federal or state income tax on it. Most people who contribute through payroll deductions also save 7.65% in FICA tax, which finances Social Security and Medicare.
Money in HSAs grows tax-free and, if used for medical expenses, can also be withdrawn tax-free. In contrast, with a traditional 401(k) or IRA, you pay income tax on your withdrawals.
‘A lot of people don’t think about how to save for health care in retirement, yet it’s one of the major expenses people will have.’
—Roy Ramthun
Due to this combination of tax advantages, HSAs—which are paired with the HSA-qualified health plans available on health-care exchanges and offered by 43% of employers—can even be a better deal than a 401(k) with an employer matching contribution. That is most likely to be the case if you are in a high tax bracket and the 401(k) match is less than dollar for dollar, says Greg Geisler, an associate professor of accounting at the University of Missouri-St. Louis.
For people with a high deductible health plan, “an HSA should be either the first or second place they look to save” for later life, Prof. Geisler says.
To open an HSA, you must be covered by an HSA-qualified health plan. For 2016, these plans have deductibles of at least $1,300 for individuals and $2,600 for a family. In return for exposing policyholders to potentially higher out-of-pocket costs, the plans generally charge lower premiums and offer individuals and families the chance to save up to $3,350 or $6,750 a year, respectively, in an HSA. (Those over 55 can save $1,000 more).
ENLARGE
Because employers save on premiums too with a high-deductible plan, many contribute to employees’ HSAs as an incentive to get them to enroll, says Eric Remjeske, president of Devenir Group LLC, which advises banks offering HSA investment platforms.
The biggest payoff with an HSA comes when the money set aside isn’t all used for current medical bills and instead compounds over time, before being used for qualified expenses. Those expenses can include not just medical bills but also dental and vision-care expenses, Medicare premiums and a portion of long-term-care insurance premiums.
According to Fidelity Investments, a 65-year-old couple who retire today and live another two decades will spend $245,000 on expenses including Medicare premiums and the 20% of medical costs Medicare doesn’t cover—a number that doesn’t include dental and long-term-care expenses.
“A lot of people don’t think about how to save for health care in retirement, yet it’s one of the major expenses people will have,” says Roy Ramthun, president of HSA Consulting Services in Silver Spring, Md.
Once you are enrolled in Medicare you can no longer contribute to an HSA. But you can continue to tap your HSA balance for medical expenses for yourself, your spouse and any dependents you may have.
You can also use your HSA for nonmedical expenses, but you will owe income tax on your distributions—and a 20% penalty if you are younger than 65.
Experts recommend that those who can afford to contribute to both an HSA and a 401(k) kick in the maximum to both. And what if that isn’t feasible? If you don’t incur much in the way of medical bills and can sock away a significant portion of your HSA contributions for retirement, the HSA has an edge, says Mr. Kitces. Some employees may want to allocate enough dollars to a 401(k) to get the company match and then direct the next dollars of savings to the HSA.
Some people go so far as to suggest maximizing the balance in an HSA by opting to pay current medical bills in cash, rather than tapping the HSA. Here, the advice is less clear, says Mr. Kitces.
While the HSA will “get better tax treatment in the future,” you will pay a price for preserving it since you will likely have to pay your current medical expenses in after-tax, rather than pretax, dollars, he says. “You have to decide whether it’s worthwhile to spend more today” on your medical bills “to get more dollars into a tax-free medical account that’s turbocharged for the future,” he adds.
Some people stockpile medical receipts for many years and file for reimbursement in retirement to create tax-free withdrawals to supplement their income in years in which tapping other accounts would push them into a higher tax bracket.
If your goal is to use an HSA to save for medical expenses in retirement, be sure to invest the account in a diversified portfolio of stocks and bonds. (If you don’t like your HSA’s investment options, you can transfer your money tax-free to an HSA elsewhere.) By leaving your contributions in a low-risk option like a money-market fund, you won’t get much return, which limits the tax-free growth that is one of the HSA’s biggest advantages, says Mr. Kitces.
Write to Anne Tergesen at [email protected]
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