Health Savings Accounts Can Build Retirement Wealth

By Linda Robertson, CFP, ChFC, CEBS, Financial Finesse October 20, 2010

In preparing a nest egg that's sufficient for retirement, it's important for employees to consider how they can maximize all their workplace benefits. For instance, can health savings accounts (HSAs) double as retirement accounts? In some circumstances they can, for employees who don't need to spend down all contributions to their HSA each year.

Here's an example of how HSAs can serve two purposes. I sat down recently with a 38-year-old woman who was worried that she wasn’t saving enough for retirement. After running a retirement projection based on contributions to her 401(k), I unfortunately had to confirm her concern. She needed to save about 5 percent more than her current 6 percent salary deferral to get her to where she needed to be.

We started talking about where she could come up with the extra savings. She mentioned she was maxing out contributions to her HSA but was thinking about lowering her deferral during the next open enrollment. Since she was putting almost $3,000 a year into her HSA and she only had an $1,800 deductible, I decided to count the excess as a supplement to her retirement savings. The amount she was contributing to her HSA was pretty close to what I would have recommended as an increase to her 401(k).

There are reasons why it might be beneficial for an employee to retire with a large balance in their HSA:

• There is some flexibility for those who don’t have high medical expenses during their working years. After age 65 they can withdraw funds for any reason, although the funds are taxable if not used for medical purposes. This would be similar, however, to funds withdrawn from a traditional 401(k) funded with pretax dollars.

HSA funds can be used tax-free for many qualified medical expenses, including long-term care insurance premiums or even remodeling their home to be more wheelchair-friendly, if necessary. As people get older they have more medical expenses, so it would be beneficial to be able to pay for them tax-free. A Fidelity study estimated that the typical 65-year-old couple will spend about $250,000 for health expenses not covered by Medicare during their retirement years.

• Funds contributed to an HSA are in pretax dollars. Together with the above, this is a benefit not found anywhere else. The Roth 401(k) is funded with post-tax dollars but has tax-free withdrawals. The traditional, pretax 401(k) has the tax break in the current year, but the funds are taxable at retirement. An HSA, however, is pretax now and tax-free when withdrawn for medical expenses (and again, employees can expect to have a lot of medical expenses in retirement).

A Growing Nest Egg

Imagine the look on the face of this employee when she connected the dots; her employer had given her the flexibility of using her HSA not only for medical expenses today but also to help her pad her nest egg.

Many financial institutions managing HSA accounts allow employees to invest HSA dollars in mutual funds. Employees might consider doing so with dollars in excess of their annual deductible. For instance, if they contribute $3,000 into their HSA and their annual deductible is $2,000, they could invest the extra $1,000 a year. If the funds were to earn 7 percent per year, after 30 years they would have an additional $100,000 in their HSA for retirement.

Linda Robertson, CFP, ChFC, CEBS, is a resident financial planner at Financial Finesse, where she provides unbiased education and advice with a focus on retirement and tax planning. Her background includes 18 years in the financial services industry with positions ranging from banking branch manager to tax specialist with NationsBank, H&R Block, and Metropolitan Life. Robertson is a contributor to the Financial Finesse blog.​

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