The tax breaks that come with a Health Savings Account (HSA) are remarkable — but not all taxpayers are eligible for an HSA. Yesterday on Faith & Finance, SMI's Mark Biller talked with host Rob West about how to qualify for an HSA and how to use such an account to maximum advantage.
To listen, click the play button below. Scroll down to read the transcript.
Faith & Finance (formerly MoneyWise) airs weekday mornings on American Family Radio. A different version airs weekday afternoons on Moody Radio.
(For more radio appearances by members of the SMI team, visit our Resources page.)
Transcript
Rob West:
A Health Savings Account can save you a lot of money now and give you a healthier retirement income later. Health Savings Accounts were designed to help folks struggling with out-of-pocket medical expenses, but a key provision makes them a terrific backup retirement account too.
Hi, I'm Rob West. This is Faith & Finance on American Family Radio, biblical wisdom for your financial decisions. (opening music ends)
Well, our good friend Mark Biller is the executive editor at Sound Mind Investing. And Mark, it's always great to have you on the program.
Mark Biller:
Thanks, Rob! Good to be back.
Rob West:
Mark, we mention the benefits of Health Savings Accounts — HSAs — from time to time on the program. But today we'll dive specifically into the connection they can have to retirement investing, which a lot of folks may not be aware of, right?
Mark Biller:
Yeah, that's right, Rob. You know, when you think about saving for retirement, you probably think about your workplace retirement plan or an IRA. But a Health Savings Account can also be a powerful retirement-savings tool, at least for some people. And in fact, in certain situations in HSA, can basically be thought of as a "Super IRA," but we're starting to get a little bit ahead of ourselves.
Rob West:
Well, that's right. So let's maybe back up for a moment and maybe you can provide a bit of background on HSAs.
Mark Biller:
Well, first of all, to be eligible to fund an HSA, you have to have a high-deductible health insurance plan — whether that plan comes from your employer or it's purchased directly by you. And, this year, that means an individual plan with at least a $1,500 deductible or a family plan with at least a $3,000 deductible.
Rob West:
OK.
Mark Biller:
Now basically, Rob, if you've got a high deductible plan like that, you're basically self-insuring for your routine and any relatively minor medical expenses. So the government lets you contribute to a Health Savings Account so you've got money on hand to pay those relatively small expenses. And then the insurance component covers you against anything major. So your HSA money can be used to cover your deductible, copays, [and] lots of other health care products and services.
Rob West:
Yeah.
Mark Biller:
[HSAs] are limited as to how much you can put in them. So for example, this year, the maximum contribution an individual can make is $3,850, or a family maximum is $7,750. And there are catch-up contributions for older people just like IRAs. So did you get all that? <laugh>
Rob West:
I think so. There was a lot there <laugh>, and actually it does sound very similar to an IRA.
Mark Biller:
Yeah, exactly. And there are similar tax benefits available as well, except in the case of HSAs, the tax treatment is potentially even a little bit better than IRAs because they're what we call triple tax-advantaged. In other words, you don't pay taxes putting the money in, you don't have taxes on the account growth, and then you don't pay taxes if the money is withdrawn to pay for what are called "qualified health expenses."
And that's why I was mentioning the "Super IRA" idea because regular IRAs and other workplace retirement plans like your 401(k), those are only double tax-advantaged — meaning that you're always going to pay taxes at one end or the other. With IRAs, [it's] either when you're putting the money in or when the money's coming out, depending on whether you're using a traditional IRA or a Roth.
But HSAs actually get that tax benefit on both sides, which is why they're unique and why we're touting them as a good retirement-savings vehicle.
Rob West:
And it's that triple tax advantage that makes an HSA a potentially powerful tool for retirement investing.
Mark Biller:
Yeah, absolutely. And the big key with this is whether a person can cover those out-of-pocket medical costs with funds from outside their HSA account. If a person can do that, then that money that accumulates in their HSA gets that triple benefit as they invest it over the years.
So, a couple of important notes here. One, if you're not sure that you can pay all your health expenses from outside the HSA, there's really no downside for trying. Y'know, for example, if you decide to save the maximum in your HSA, but, but then you end up having to dip into it to pay for your ongoing health costs, you've still got some of that money sitting in the very best type of account for a long-term investing.
And then the second point is just that not all HSA custodians offer access to investment options. A lot of them do. Fidelity, for example, does. Another popular HSA provider, Lively, offers access to Schwab's investing platform. So a lot of places xxxxxxx
plans do offer you good investing options, which, of course, is more important if you're trying to use the HSA in this kind long-term retirement savings capability.
Rob West:
Yeah. Now you shared with us that the real power of these HSAs is that they're triple tax-advantaged — no taxes going in, no taxes on account growth and no taxes if the money is withdrawn to pay qualified health expenses. But one of the stipulations of that triple advantage is that the HSA money has to ultimately be used for in fact those qualified medical expenses. So talk to us about that.
Mark Biller:
Yeah, that's correct. And Rob, if, if you do end up in retirement with money in an HSA and you need to take it out for non-medical expenses, at worst it ends up functioning just like a regular IRA where you end up paying tax on those withdrawals.
But there's actually a loophole that's really important for people who are wanting to use HSAs in the way that we're talking about today.
In retirement, you can take money out of the HSA for any new qualified health expenses that you incur. That's true all the way through your life. But the loophole is that, in retirement, you can also reimburse yourself for qualified health care expenses that you incurred in the past.
So that means as long as you save your receipts for health care expenses that you're paying out-of-pocket, now you'll have the ability to take those amounts out of your HSA in retirement whether you have new health care expenses or not.
Rob West:
Wow.
Mark Biller:
So let me give you an example of that. Suppose at age 66 you're retired and you withdraw $15,000 from your HSA to buy a car or any other non-health expense. As long as you have $15,000 in receipts that you haven't used, you haven't claimed in the past, then even if you incurred those expenses years earlier, you can use those receipts to offset that entire withdrawal making it tax-free.
Rob West:
Wow, that is a powerful benefit and this is where HSAs are different from FSAs — Flexible Spending Accounts, right?
Mark Biller:
Absolutely. So HSA account balances can be carried forward year after year and you can get that compounding in your investing account. That's very different from a Flexible Spending Account where the money has to be spent each year or else you forfeit it.
And it's also worth pointing out that once you enroll in Medicare, which most people do at age 65, you have to stop contributing to an HSA. But any existing HSA money that you have can continue to be invested and can continue to pay these qualified health care expenses.
Rob West:
You know, that makes me think of a program we did recently, Mark, on the "order of operations" when we're managing money. I suppose, in this case, getting things in the right order is really important, right?
Mark Biller:
Yeah, it really is. And SMI's always recommended prioritizing those retirement savings this way: If your workplace plan offers a match, contribute there to get full match. Then we usually suggest going over to an IRA because they usually have the broadest set of investment options. And then if you still need to save more for retirement, you would ultimately go back to your 401(k) plan last.
Now, if your workplace plan doesn't offer a match, then we would just say max out an IRA and then turn to your workplace plan.
But because these HSA benefits are so compelling, if you're eligible to fund an HSA and you think that you're going to be able to pay at least some of those health care expenses outside the HSA — so that it can grow over time — then we would change those recommendations a little bit. We would say in that case, you still want to go for your matching contributions in your workplace plan, but then we would say the HSA should probably come next before you move on to funding an IRA.
Now, if your workplace plan doesn't offer a match, we'd actually suggest maxing out the HSA first, then moving on to an IRA. And finally back to your workplace plan.
Rob West:
Yeah, that's really helpful. And there are a lot of moving parts. So by the way folks, if you want to check out this article with all the details. Again, it's called A Health Savings Account: The Other Retirement Account. You'll find it as a free download at soundmindinvesting.org.
Mark, this makes me think of the fact that healthcare costs in retirement are always a major concern for folks. Medicare, of course, doesn't cover everything. So give us an idea of how contributing to an HSA can really alleviate some of those fears.
Mark Biller:
Well, in the article, Rob, we include a quote from a research firm that found that an individual who starts saving by age 40 can accumulate sufficient savings in an HSA to cover the cost of health care in retirement. And importantly, those researchers said that that projection would still hold even if the individual had to use a small portion of that HSA money to cover their current health expenses.
So the bottom line of all of that is this is definitely a tool that's worth looking into if you're covered by a high-deductible insurance plan because it can really put you on a good path for retirement savings.
Rob West:
And then quickly mark, for somebody who has a choice — HSA or not — are there some rules of thumb perhaps that would help them decide whether this is the best option for them?
Mark Biller:
Well, you always do have to look at the costs of the plan that you're getting. And, you know, with any insurance there are always going to be specific details in terms of those deductibles and so forth. You certainly don't want to put yourself in a position where you can't cover your own health care up to those high deductibles. So "safety first" when it comes to insurance. But this can be a good tool for a lot of people.
Rob West:
But I suspect somebody who's younger, healthy, and has the ability to max it out would be ripe for an HSA.
Mark Biller:
Absolutely, because young people are often overpaying for insurance that they don't end up using and really likely are not going to need. So this is a perfect model for those folks as long — as they have emergency savings to cover if they do need to pay out-of-pocket up to that deductible amount.
Rob West:
That's really helpful. Mark, great information as always. We really appreciate you dropping by today.
Mark Biller:
Always my pleasure, Rob.
Rob West:
He's Mark Biller, executive editor at Sound Mind Investing. You can read more about this in their article, Health Savings Account: The Other Retirement Account at soundmindinvesting.org. Much more to come just around the corner, including your questions. Stay with us.
