How your health plan can help you save for retirement

You may be offered a high-deductible health plan by your employer during open enrollment. Beyond considering how it meets your health-care needs, you should think about how it could help your retirement savings.

Having a high-deductible health-care plan allows you to open a health savings account. An HSA provides tremendous tax advantages, especially if you are healthy enough not to use the account to pay for medical expenses.

"HSAs are the most tax-friendly investment vehicles on the planet," said certified financial planner Edward Vargo, founder of Burning River Advisory Group. You get a deduction when you make a contribution — as with a 401(k) plan — and, if it's used for qualified medical expenses, you get to make a tax-free distribution similar to a Roth IRA. It's the rare case where you get to have your cake and eat it, too, he said.

People had opened 18.2 million HSAs as of this past June 30, up 25 percent from a year earlier, according to HSA investment consulting firm Devenir. Assets had grown to an estimated $34.7 billion by June, up 22 percent year-over-year. (See chart below.)

More than three-quarters of HSA account holders withdrew less than they contributed last year, and 24 percent didn't touch any money from their accounts, according to a Fidelity Investments analysis of the more than 500,000 accounts it administers.

Money invested in HSAs is tiny compared to what is stashed in other retirement accounts. The average Fidelity HSA account holder has a $3,150 balance, compared with an average balance of $94,100 in Fidelity IRAs and an average of $90,600 in 401(k) plans administered by Fidelity.

However, HSA account holders who are healthy enough to avoid most medical costs, or wealthy enough to pay for deductibles and out-of-pocket expenses, are slowly building their nest eggs through these savings plans. Devenir estimates the average account holder who uses an HSA as an investment option has a balance of $15,092.

Like all tax-advantaged accounts, HSAs have restrictions on how much you can contribute.

For 2016, you and your employer can contribute up to $3,350 for individuals and $6,750 for families. In 2017, the limit rises to $3,400 for individuals, but the family limit stays at $6,750. Account holders age 55 and older can contribute an extra $1,000.

Don't confuse HSAs with flexible spending accounts, which allow you to pay for medical expenses and dependent care with pre-tax dollars. With a flexible spending account, you must spend all your balance each year or you lose it — unless your employer's plan permits you to roll over $500 to the next year.

"The biggest challenge with HSAs is getting people to realize that it is not 'use it or lose it'," said Jeanne Thompson, Fidelity's senior vice president of workplace investing.

To qualify for an HSA, you will need a high-deductible health plan. That means you'll have to pay a deductible of $1,300 for individual coverage and $2,600 for families. The maximum annual out-of-pocket costs for these plans are $6,550 for individuals and $13,100 for families.

Your employer may direct you to sign up with their preferred HSA provider, but if you are enrolled in a qualified high-deductible health plan you can choose whatever provider you want.

This is important because if you want to use your HSA as a retirement account, fees and investment options matter.

Some providers may require you to hold a certain amount of your account in cash and others may limit your investments to low-yielding certificates of deposits. And watch out for account fees that can run as high as $7 per month on top of what you pay for the underlying investments.

"HSAs should be treated no differently from other retirement funds in terms of investing," said Rose Swanger, a CFP and principal of Advise Finance who recommends broad, low-cost index funds.

Use HSASearch to comparison-shop for more than 320 providers.

As an HSA investor, you should keep all the receipts for the medical costs you pay out-of-pocket. That way, you can tap your HSA up to the amount you've paid in out-of-pocket expenses whenever you want.

It's that flexibility that makes an HSA the "ultimate retirement account," said "Brandon," a 34-year-old software developer who blogs anonymously as the Mad FIentist.

The blog is popular among the "financial independence, retire early," or FI/RE, movement, which consists of people who aim to quit their jobs in their 40s and pursue the work and lifestyles they want.

Brandon encourages extreme savers to open HSAs after they max out their other retirement plans. "It's triple tax-free money," he said.

In December 2013, he paid for an appendectomy with cash out of his considerable savings. Now Brandon is saving that receipt for retirement.

HSA money will come in handy in retirement. Fidelity estimates a 65-year-old couple retiring in 2016 will need $260,000 to cover health-care costs. Plus, the average woman could spend an estimated 70 percent of her Social Security benefits on health-care-related expenses, according to a recent study by the Nationwide Retirement Institute.

If you're lucky enough not to use your HSA funds for medical expenses, you can begin withdrawing money from your HSA account for any expenses after you turn 65 without paying the 20 percent penalty, though you would be subject to income taxes on the distributions.

It's early days for HSAs as retirement accounts. Devenir projects that the HSA market will exceed $50 billion in assets held in more than 27 million accounts by the end of 2018.