Savings trends

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.”


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.


GAO Warns That Caregivers Face Special Challenges in Retirement Readiness

The U.S. Government Accountability Office (GAO) has released a report that focuses on difficulties many caregivers face in achieving a financially secure retirement. The GAO notes that, on average, about 10 percent of the U.S. population was engaged in providing care services to a family member or someone outside of their family during the 2011 to 2017 survey period.

Of the 49,000-plus providing such care services, 51 percent were doing so for an elderly parent and 7 percent were caring for a spouse. About one quarter each of the total were providing care services for another family member or for a nonrelative (some provided care to more than one recipient).

The following were among the possible consequences of being a caregiver.

  • More interference with work and career, and, therefore, lower income
  • Smaller retirement accumulations
  • Less Social Security benefits because of employment interruptions

Policymakers’ suggestions to reduce such adverse consequences included the following.

  • Consider providing an enhanced Social Security benefit to those whose income and future retirement security may be compromised by their service as caregivers.
  • Better educate potential caregivers of the financial—and, ultimately, security—impacts of reducing their employment or leaving the workforce to provide such care.

The GAO released both a Fast Facts summary and highlights of its findings.

 

 

 


Rick Irace Discusses Emerging Trends from 2018

In a recent Wealth Management article, Chief Operating Officer Rick Irace discusses retirement industry trends that emerged in 2018. He mentions advisors’ transition from commission-based models to fee-based, increased utilization of auto-enrollment, the emergence of financial wellness programs, and the increased availability of Roth options in smaller plans. He also ​notes that business owners are looking for additional administrative services. “Business owners face many challenges just running their day-to-day businesses. At the same time, they want to help their employees prepare for their financial futures. Many are looking to their providers and TPAs for additional administrative services, perhaps even to take on 3(16) fiduciary responsibility,” he adds.


Steve Christenson Discusses Why it’s Prime Time for IRAs

In a recent CUInsight article, Executive Vice President Steve Christenson discusses why it is prime time for IRA deposits, and how the generations are seeking them. Each generation has unique savings characteristics that credit unions must keep in mind. “Finding the right way to reach all of these groups effectively is a key challenge. Making sure you have the expertise available is equally critical” notes Christenson. “Each generation is seeking a trusted source for financial information… As deposit products become more competitive for every age group, credit unions have the opportunity to provide a valuable service and gain long-term members and deposits.”​


Ascensus Ranked a Top 5 Retirement Plan Provider

In a recent ​Cogent Reports annual study, Ascensus was ranked a top 5 retirement plan provider most likely to be considered by small to mid-sized business owners. “When asked to pinpoint the reasons why they’re likely to switch providers, Small-Mid plan sponsors cite issues with fees, choice of investments, and participant service most often. Yet the factors that these plan sponsors seek in a new plan provider include the more personal aspects of trustworthiness (being a company plan sponsors trust), acting in the best interest of participants, and a perception of being easy to do business with,” the report indicated.