Using Health Savings Accounts to Invest for Retirement

August 19, 2014

New York Times
by Ann Carrns

Health savings accounts are often promoted as a way to help cover continuing out-of-pocket medical costs. But the accounts, which have tax advantages, can also be used to save money for health expenses in retirement — and the savings can be substantial, a new analysis finds.

A report this month from the Employee Benefit Research Institute finds that a person contributing to an H.S.A. for 40 years could save up to $360,000, assuming he or she contributes the maximum amount allowed and invests the money at a 2.5 percent rate of return. The total reaches $600,000 after four decades, assuming a 5 percent rate of return.

The catch is that to achieve that level of savings, you would have to start young and not make any withdrawals until retirement. That means you would need to pay for continuing health expenses using after-tax money, which could be a stretch for many people.

“If you’re in a position to do that, it may make sense,” said Paul Fronstin, a researcher at the institute and the report’s author. “It depends on the trade-offs you’re willing to make.”

About 12 million H.S.A. accounts now hold assets of about $23 billion, but just 13 percent of the money is in investment accounts, according to midyear estimates from Devenir, based in Minneapolis, which tracks big H.S.A. providers.

H.S.A.s, which have been available for 10 years, are not for everyone. You can contribute to an H.S.A. only if you have a specific type of health insurance plan that has a high deductible and meets other criteria. Your yearly deductible — the amount you must pay out of pocket for care before the plan starts paying — must be at least $1,250 for an individual and $2,500 for a family. (Some preventive services are not subject to plan deductibles.)

Ann Reilley (Gugle), a financial planner in Charlotte, N.C., urges her clients to use the accounts for long-term savings, by letting money accumulate until there is enough to invest in a mutual fund or other investment vehicle. She counsels clients to avoid tapping the money for current health costs, if they can. “I’d use the H.S.A. as a last resort,” she said.

That is because the accounts get a triple tax benefit: The money you contribute reduces your taxable income. It grows tax-free. And withdrawals are tax-free as well, as long as the money is used for qualified health expenses.

Unlike the money in some other types of health care accounts, money in an H.S.A. is portable, meaning you can take the money with you if you switch employers. The money grows from year to year if you don’t spend it. (H.S.A.s are often confused with health care flexible spending accounts, workplace-based accounts that may or may not let you to carry over some funds from year to year.)

Jeff Munn, vice president for benefit policy development at Fidelity Investments, suggests that H.S.A.s can be good options for saving for retirement health needs — if you have other money to cover your current health costs. Before deciding whether to invest the funds, you should review your typical health expenses to see what your potential risk is.

“Make sure you understand the deductible and out-of-pocket maximum requirements of your plan,” he said. “Ask yourself, ‘What, realistically, are my expenses likely to be?’??”

If your plan has a $1,500 deductible, for instance, you may not be completely off the hook once you spend that amount. Many health plans impose additional cost sharing — 20 percent of costs, for example, after you meet your deductible — until you reach the plan’s out-of-pocket maximum. If your plan’s maximum is $5,000, that means you could be responsible for as much as $3,500 more after meeting your deductible. If you do have that amount available — and spending it would not cause other financial problems — then it may make sense to focus on your H.S.A. as a long-term investment, Mr. Munn said.

Kevin O’Reilly, a financial planner in Phoenix, said he has an H.S.A. for his family and keeps part of the money in cash to cover costs subject to his deductible. He invests the rest for the long term. “Health care is a big part of your expenses in retirement,” he said.

Mr. Fronstin, however, warns that even if you make all the contributions you are entitled to, you shouldn’t count on your H.S.A. to cover all your health needs in retirement, given the current cap on contributions. “It won’t be sufficient for all their needs,” he said. “But it will be helpful.”

Here are some questions about Health Savings Accounts:

??How much can I contribute to an H.S.A. each year?
You can contribute up to $3,300 for individual coverage and $6,550 for family coverage in 2014. In addition, if you are 55, you can make an extra “catch-up” contribution of $1,000 a year.

??Do I have to have workplace health insurance to have an H.S.A.?
No. But often, employers offering H.S.A.s along with high-deductible health plans “seed” the accounts. Roughly 93 percent of the employers that offered H.S.A.s in 2012 put money into the accounts for employees, with an average contribution of $884, according to Fidelity.

??What if I use money from my H.S.A. for nonmedical expenses?
You will pay income tax on the withdrawal, plus a penalty of 20 percent, according to the Employee Benefit Research Institute. (After age 65, you will pay taxes but not the penalty, according to HSA Bank.)