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Health Savings Account – The ROTH IRA on Steroids.

Health Savings Account – The ROTH IRA on Steroids.

| March 13, 2017

Over the course of the last two years, we have seen many companies either add or switch entirely to a high deductible health plan for their employees.  For some companies, the high deductible health plans compliment a major medical plan or have completely replaced them.

While this may seem like a major change that’s not to the advantage of employees, there is a silver lining as it has opened up opportunities for tax-favored retirement planning.  With a qualifying high deductible health plan, people now have the opportunity to use a health savings account, or HSA.  These accounts can be a phenomenal tool for retirement money.

The average married couple in the US will spend close to $250,000 in retirement for medical expenses.  I suggest we look at a tax efficient way to do this.

How does an HSA work? 

HSA's allow a participant with a qualified high deductible health plan to save annually up to $6,750 as a family on an annual basis.  If you are single, the limit is $3,400 or your deductible, whichever is less.

The tax advantage of a health care savings account is as follows: 

  1. Your contributions are tax deductible.
  1. Tax-Deferred Growth - Contributions to an HSA may be invested in stocks or bonds, much like a 401(k) or 403(b) and grow tax deferred. (Some employer HSA plans do not have this option. You can look to Select Account for an HSA with investment options. You can use their pre-selected menu of investment options which include low-cost index funds or open a brokerage account on the Charles Schwab platform.)
  1. Tax-free Withdrawal – All of the growth inside an HSA is tax-deferred, much like a 401(k) or 403(b). That growth can also be withdrawn tax-free as long as the distributions are used for qualified medical expenses. 

From a financial planner's perspective, this is the perfect investment tool for retirees. 

The HSA is a ROTH on steroids!

The planning idea around using a healthcare savings account is as follows:

  1. Max out the healthcare savings account on an annualized basis.
  1. Aggressively invest it in the stock market for people that have a time horizon of up to 10 years before they retire.
  1. Do not use the healthcare savings account to pay for your medical expenses before you retire. Try to use cash flow your medical expenses from your take-home paycheck and leave the HSA account “sitting on the shelf” for the deferred growth.

Using a healthcare savings account to build up money for retirement medical expenses is a very tax efficient and may be a wise strategy.  With the changes in healthcare we’ve seen, we’re encouraging our clients to contact us to discuss their options either with their employer or setting up an outside healthcare savings account to help meet retirement medical expenses down the road.

Thanks for taking a look!

Tim Jaynes, AIF®