The accounts come with powerful tax
advantages, but not many people use HSAs, and even fewer use them in the
optimal manner
Aug 28, 2019 @ 10:46 am By Jamie
Hopkins 
Health care costs
present a significant retirement risk for many Americans. According to a Fidelity research report, a
65-year-old couple retiring in 2019 can expect to spend roughly $285,000 in
health care and other medical expenses throughout their retirement. Women are
expected to have higher costs, with roughly $150,000 in average expenses
compared to $135,000 for men.
When you
compare the
average medical expenses in retirement to what the average
65-year-old couple has saved for retirement, you realize the issue at hand.
The Center for Retirement Research
at Boston College estimated that in 2016, the median
household approaching retirement with a 401(k) or IRA had roughly $135,000
saved. That total doesn't count pensions, nonqualified savings or Social
Security. But it still illustrates the problem: Many Americans entering
retirement have less saved in their retirement accounts than they will need
just for health care costs in retirement.
One viable solution
to the underfunding of retirement health care expenses? Health savings
accounts. HSAs have some of the best tax benefits possible in the Internal
Revenue Code; contributions to HSAs are tax-deductible, as are the matching
contributions an employer makes. Any gain is tax-deferred, and if the money is
withdrawn to pay for qualified health care expenditures, it comes out tax-free.
Sounds too good to
be true, right? You don't get taxed on the money going in, you don't get taxed
on the growth and you don't get taxed on the distribution. It's a triple threat
and the best tax-advantaged savings vehicle in the tax code.
Although HSAs are
such a powerful savings vehicle, very few Americans take advantage of them.
According to a survey from America's Health Insurance Plans, roughly 22 million
Americans chose to use an HSA in 2017. The good news is, that's more than a 9%
increase in enrollment from 2016.
So why aren't more
people using HSAs? One factor that might hold them back is that you have to be
enrolled in a qualified high-deductible health care plan to be eligible for an
HSA. Many Americans aren't enrolled in that kind of plan and therefore can't
take advantage of any HSA benefits.
But even for those
who are using an HSA, it appears many aren't optimizing their accounts.
According to research by the Employee Benefit Research
Institute, many Americans are using HSAs as a specialized
annual checking account for health care and not as a long-term savings vehicle.
Sixty-six percent of HSA users withdrew funds. And only 5% of HSA users
invested in anything other than cash in 2017.
This is
unfortunate, as perhaps the best benefit of an HSA is the ability to save for
the future with tax-deferred and potentially tax-free investment gains. Even
people who use HSAs today are essentially using them wrong and missing out on
the best benefit: tax-advantaged investment growth.
The misuse of HSAs
shouldn't come as a surprise. A new study by HealthSavings Administrators
showed a general lack of knowledge around HSAs among both financial advisers
and consumers. In the survey, 36% of advisers said they didn't fully understand
how HSAs work, and 40% said their clients didn't understand HSAs.
Advisers' lack of
knowledge about HSAs proves to be bad news when a client gets one. According to
the same survey, 47% of advisers position HSAs as a spending account, rather
than a savings.
Even if a client
were to get an adviser to help with their HSA planning, there's a good chance
the adviser would recommend using the HSA as a short-term spending account,
thereby missing out on the long-term investment potential.
HSAs can be used to
help pay for a plethora of expenses: retirement health care costs, Medicare
premiums, long-term care premiums and other health care out-of-pocket costs in
retirement. However, we need to use and fund HSAs while working — investing for
the long term to maximize their tax benefits for retirement.
The script on HSAs
needs to be flipped to help tackle the tremendous health care costs many
Americans will face in retirement.
HSAs should be
approached from a long-term investment and retirement approach, not just used
as a checking account. The sooner advisers and clients embrace that mindset,
the better.
Jamie Hopkins is director of
retirement research and vice president of private client services at Carson
Group.
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