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How to Use the HSA, for Medical or Retirement Savings

Health savings accounts offer a unique triple tax advantage

The health savings account, or HSA, can be a powerful savings tool—if you approach it the right way.

These accounts, which Congress authorized in 2003, are more than just a simple savings tool for medical emergencies. Retirement planners laud the HSA’s triple tax advantage and its use as a complementary savings vehicle to 401(k) plans.

Oftentimes when people first hear of HSAs, it is during this time of year. For companies with policies that start in January, open enrollment typically happens in the fall. During this period, many employees are already stressed about choosing and selecting other benefits.

“I don’t think most people understand HSAs from the get-go,” said Roy Ramthun, a consultant who specializes in HSAs. “From my experience, the HSA gets 30 seconds of the health benefit presentation. It’s all about the insurance, and then ‘Oh, you have this.’”

HSAs are unique in the triple tax advantage they offer: You can contribute to them by setting aside pretax earnings without paying federal or state income tax. From there, that money can be invested and grows tax-free. Additionally, if used for medical expenses, you can withdraw this money tax-free before retirement, which you can’t do with a 401(k) or an individual retirement account.

Eric Remjeske, president of Devenir Group LLC, said since Congress authorized these accounts in 2003, the number of accounts and the average account balance have both grown over time. By 2011, there were 6.2 million HSAs, according to Devenir Research; this past June, that number had grown to 26.3 million.

More money is flowing into HSAs every year. Devenir Research data show that $43.5 billion was deposited in HSAs in 2018, with $10.2 billion invested, a sharp increase from the year before when $31.5 billion was deposited and $5.5 billion invested. By 2021, Devenir estimates that number will rise to $67 billion deposited with $21.2 billion invested.

While the 401(k) remains the predominant retirement savings vehicle, Mr. Ramthun recommends contributing to both a 401(k) and HSA, especially if your employer offers a match for either.

“Advisers are now asking the question: Where do you put the money, 401(k) or HSA?” said Steve Christenson, executive vice president at Ascensus, a retirement and college savings service provider. “They’re seeing more of a balance amongst consumers.”

To make the most of both, research if your employer offers matches. If your employer also offers an HSA match, Mr. Ramthun recommends prioritizing that contribution, as you’ll eventually be able to reap greater benefits from the HSA’s triple tax advantages. From there, contribute to your 401(k), and if your employer also offers a match there and you’re taking advantage of it, you’ll be benefiting from both savings plans.

The HSA contribution limits for 2020 are $3,550 for an individual with a high deductible health plan and $7,100 for an individual with family coverage. The catch-up contribution amount for those 55 years old or above is an additional $1,000. The amount contributed to an HSA doesn’t affect the contribution limits for 401(k) plans or IRAs, which are $19,500 and $6,000 respectively for 2020.

One approach to the HSA is to consider paying for current medical expenses out-of-pocket after establishing the HSA; you can then file for reimbursement in retirement. This way, you can supplement your retirement income—entirely tax-free.

If you’re taking this approach, you should make sure you invest your HSA balance in a diversified portfolio, so you can maximize its potential return. According to 2019 data from Ascensus, less than a third of HSA account holders eligible to invest their funds actually did so.

Meanwhile, keep track of the medical expenses you pay out of pocket. Keeping these receipts on hand means you can then file during retirement to have them reimbursed. But remember: You have to keep the receipts from any medical expenses you paid for out-of-pocket before retirement, just in case the IRS ever comes knocking for an audit.

An HSA can also be considered as a “rainy day” medical fund that works in tandem with your 401(k) to help offset the cost of out-of-network care, over-the-counter medicines or other things your insurance may not cover. Even if you’re healthy now, studies show you could still be spending much more on medical expenses once you enter retirement.

Remember: You can’t keep contributing to your HSA once you’re enrolled in Medicare. So maximizing contributions now will allow the miracle of compounding to work, growing that money in your HSA over time.

“Everything about retirement planning says, ‘Start young, be regular and invest,’” Mr. Ramthun said. “That’s what we want people to hear about HSAs.”


How HSAs May Help Women Clear Retirement Savings Obstacles

Throughout the ages, women have grown adept at doing more with less. It’s a skill that will stand many of today’s women in good stead when it comes to retirement savings.

Compared with men, women generally earn less, take more career breaks and live longer, so it stands to reason that they need more income — not only for general living expenses, but to pay for additional healthcare associated with aging. Women who reached age 65 in 2016 are expected to live almost three years longer than men, according to the Social Security Administration. What’s more, a recent study claims that by age 65, a woman will need to have saved $161,000 — compared to a man’s $148,000 — to cover healthcare costs in retirement.

It all adds up to an inescapable, if frustrating, conclusion: If women want to sustain a secure lifestyle during their retirement years, they’ve got to save more.

The good news is that there are ways for them to boost their retirement readiness through a number of methods. One that’s often overlooked is incorporating a health savings account into their savings strategy early on. HSAs’ unique features can help women supplement traditional retirement income via employer-sponsored retirement plans, IRAs and Social Security, and can help to overcome some of their savings obstacles, too.

 

Bridging the 18% gap

Women’s salaries, on average, are 82% of men’s, according to a recent Bureau of Labor Statistics report, and this 18% gap may mean less money available to put toward retirement each year. While an HSA might not close the pay gap, it can help a woman’s money go further. HSAs offer unparalleled tax benefits. The “triple tax advantage,” as it is known, allows tax-deductible contributions, tax-deferred earnings and tax-free distributions for qualified medical expenses. (See IRS Publication 502, Medical and Dental Expenses, for a partial list of qualified medical expenses.) These tax savings can free up money to save or spend elsewhere, while the unused contributions can be saved for retirement. HSA assets can pay for qualified medical expenses, but they don’t have to be used at all. Unlike a health flexible spending arrangement (FSA), an HSA is not subject to a “use-it-or-lose-it” rule; balances are carried forward from year to year — even into retirement.

 

Turning career breaks into savings breaks

Most workplace retirement plans require ongoing employment in order to save, which can mean fewer opportunities for women, who tend to take career breaks more often than men. But with an HSA, women can remain eligible to contribute to an HSA even while they are not working. For example, if a woman is covered by her spouse’s HSA-eligible, high-deductible health plan, she may continue to put money into her HSA, up to the annual limit. This means her HSA can keep growing even during a career break.

 

HSAs in retirement

An HSA can lessen the burden of higher healthcare costs and can be used as supplemental income. While women cannot contribute to an HSA once they are enrolled in Medicare, they can still keep using HSA assets during retirement.

Sure, HSA assets can be used to pay for qualified medical expenses — including Medicare premiums and certain qualified long-term care expenses — instead of dipping into retirement plans or IRAs. But once a woman reaches age 65, she can take HSA distributions for any reason without penalty (although she will pay taxes on those distributions that are not qualified medical expenses).

With so many savings obstacles lined up against them, women in the workforce need to have a plan to meet their retirement savings goals. While every individual’s strategy will be different, one thing is certain: for women, making HSA savings a priority now could pay off in the future.


Securing Longer-Term Deposits with IRAs

As credit unions continue to seek ways to increase their member count and make capital available to those members, they often overlook a key source of longer-term deposits: IRAs. By taking a generational approach to the opportunities that IRAs provide, credit unions can expand their deposit base.

 

Millennial Approach

Millennials are good savers and are looking for financial services that they trust and that serve a worthwhile purpose. Credit unions can attract these younger savers by making educational modules about saving with an IRA available on their websites, as well as other outlets, like YouTube. And while millennials are likely to establish an account online, they are just as likely to visit a credit union branch directly, if inclined to do so. Credit unions should have a strong online new account set-up process, but also be prepared for in-person visits.

 

Generation X Approach

Generation Xers, who have now entered their 50s, are facing new life changes. Their children are close to, or have already, headed off to college, so gen Xers are beginning to refocus on retirement. And they are finding out that their retirement savings is behind plan. This group may benefit from consolidating their retirement plan assets and developing a revised retirement strategy.

Gen Xers are also starting to face the loss of their parents. They may be inheriting their parents’ savings, including IRAs. Under current regulations, IRA beneficiary options can be confusing and gen Xers may not realize the potential value of keeping those assets in an inherited IRA. This type of information or guidance may not be readily available to gen Xers. They likely will have questions, prompting them to call or visit the credit union. Credit unions should be ready to answer their questions and walk generation X members through all of their options as IRA beneficiaries

 

Baby Boomer Approach

Baby boomers are now reaching traditional retirement age (age 65) at a rate of 10,000 per day. This generation is either in retirement, partial retirement, or still fully employed. They are clearly focused on their specific retirement needs, both in terms of income and healthcare coverage.  They are looking for advice on rollovers from employer plans, ways to receive a stable monthly income, and someone to assist them with how to leave behind whatever remains to future generations. Credit union staff that recognize the baby boomer’s areas of focus and how an IRA can help them will be able to better address their concerns.

 

Become a Trusted Source

Regardless of which generation they fall into, people will remain loyal to the financial organization that helped them create a successful outcome. The key is to become their trusted source for savings education and problem solving. By effectively assisting members with their IRA questions and offering savings solutions, a credit union can become an integral part of that successful outcome. This may lead to more deposits for a longer period of time, and, in turn, enable a credit union to assist an even larger circle of potential members on their road to success.


NAPA Highlights Ascensus’ Retirement Plan Design & Participant Data

A recent feature published by the National Association of Plan Advisors (NAPA) spotlights retirement plan design trends and data on employees’ savings progress released by Ascensus earlier this year. The article highlights the impact that auto features can have on plan participation and underlines the fact that 401(k) plans on our platform that couple auto features with a match have the highest overall average participation rate at 84%.​​ It also ​covers results from our Retirement Outlook Tool which allows employees to track their progress to retirement savings goals based on personal variables and their current savings rates. Younger generations of employees tend to make up the smallest portion of the segment of savers who are “on track” to goals, but they also have a longer time horizon to retirement and have plenty of opportunities to ramp up their current efforts.


David Musto Urges Congress to Maintain Momentum, Pass SECURE Act

Ascensus President David Musto contributed a byline to PLANADVISER in which he encourages political influencers to look beyond next year’s election and consider our nation’s outlook in 2044. Based on a retirement age of 67,  the average American worker is expected to retire in 2044. Will these workers be able to retire comfortably, having accumulated adequate savings? Musto highlights how the passage of the SECURE Act, with its provisions incentivizing retirement plan creation and increasing plan accessibility, might help boost their chances. “Kudos to Congress for working together to propose meaningful and much-needed retirement reform legislation. We’re almost over the hurdle and on our way to a brighter retirement future for all Americans,” he concludes.


Rick Irace Discusses the Importance of Education to Help Close Retirement Savings Gap

In a recent PLANSPONSOR feature, Rick Irace, COO for our Retirement division, shares insights from Ascensus’ Retirement Outlook Tool and discusses employers’ opportunity to close the education gap on retirement planning. In 2018, 19% of Ascensus plan participants who used this tool found that they were on track to meet their savings goals. To help address this readiness issue, “plan sponsors should focus on educating employees on the fundamentals of their plan,” states Irace. “For younger generations of employees, many plan sponsors and financial advisers also find it useful to highlight why it makes sense to start saving now, even if it’s at a very modest rate.”

Our data suggests that simply being more engaged with their retirement account website is correlated to higher savings outcomes for participants. “A saver who logged into our participant website at least once in 2019 shows an average 401(k) account balance 25% higher than a saver who has not logged in since 2018, 46% higher than one who has not logged on since 2017, and 67% higher than one who has not logged on since 2017,” he added.


Peg Creonte Shares Data on Use of 529 Savings for K-12 Education

In a recent USA Today feature​, Peg Creonte, SVP of business development for our government savings division, shared insight on the usage of 529 account savings for education expenses for beneficiaries in kindergarten through 12th grade. Ascensus data suggests a minor jump in the overall percentage of qualified 529 withdrawals made for beneficiaries ages 16 and under, at 5.5% in 2018 versus just 4% in 2016. Individual states are taking different approaches on how to educate savers on the potential use of 529 savings for K-12 related expenses, notes Creonte. “Some states are neutral…And on the other end of the spectrum, some states are actively encouraging people to use the funds for K-12,” she adds.