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5 steps to make the most of your HSA

  • Health savings accounts have a triple tax advantage, which can make them a good way to save for health expenses in retirement.
  • To make the most of HSA savings, invest the contributions and limit withdrawals.

If you're hoping to build retirement wealth in a health savings account, it helps to have a game plan.

There's growing buzz and excitement around health savings accounts, or HSAs, Peter Stahl, a certified financial planner and president of Bedrock Business Results, told advisors last week at Schwab IMPACT 2017 in Chicago.

No wonder: HSAs have a triple tax advantage. Contributions are tax-deductible, typically grow tax-free and can be withdrawn without incurring taxes so long as you use them for qualified medical expenses. To use an HSA, you must be enrolled in a qualifying high-deductible health insurance plan.

"A lot of times, it is the retirement years when health-care costs will be the greatest." -Peter Stahl, Bedrock Business Results

HSA savings could be especially valuable in retirement. A recent report from Fidelity estimates a healthy, 65-year-old couple retiring this year will need $275,000 to cover their health-care costs in retirement.

Here are Stahl's strategies to make the most of an HSA:

1) Start by age 50

If you haven't been able to get an earlier start, age 50 is a good point to begin focusing on using your HSA for retirement savings, Stahl said. Why that age? You're in your peak earning years, and past the juggling of big family expenses such as college tuition.

"Realistically, if [you] can contribute to an HSA prior to that, by all means, do so," he said.

2) Maximize contributions

If you're married, split your HSA savings into two accounts, with money in both your name and your spouse's, Stahl said. You'll still be limited to the maximum annual family contribution (currently $6,750), but then each spouse can make an annual $1,000 catch-up contribution once they reach age 55, he said.

Workers who have access to an HSA as well as a 401(k) may want to strategize which account they focus on first. Given that triple tax advantage of HSAs, in many cases it makes sense to set aside just enough in your 401(k) to get the full match, and then fund your HSA fully before circling back to top off your 401(k), Stahl said.

"Generally speaking, that's a pretty good strategy," he said.

3) Invest

HSA contributions often default into a money market, but funds intended as long-term retirement savings should be invested as such, Stahl said. Compare investment options and fees at different providers — you can choose whatever provider you want, although if your employer provides a match it may only do so with its preferred partner.

A small but growing number of consumers are investing their HSAs. As of mid-2017, HSAs held $6.8 billion in investment assets, representing about 16 percent of all HSA assets, according to Devenir. The average investment account holder has a balance of $15,146, including both their deposit and investment accounts.

4) Avoid dipping into savings

Then, the tough part. If you can, pay for all current health expenditures out of pocket in order to "not spend a nickel" out of that HSA, Stahl said. That gives you a balance to roll over for future years and invest.

(Save those receipts, though. There's no requirement that you claim medical expenses in the year they occur; you can make a tax-free withdrawal even years later in retirement.)

"With a little bit of planning, this really can work," Stahl said — by his estimates, a couple putting aside the current annual maximum each year from age 50 to 65, and investing those funds, could amass nearly $230,000 more for retirement. "A lot of times, it is the retirement years when health-care costs will be the greatest."

5) Mind retirement decisions

Under current rules, once you enroll in Medicare you can no longer fund your HSA, Stahl said.

"That kind of stinks, but that's the rule," he said.

The ability to pay for health-care needs is one of the most critical issues of retirement.
Hero Images | Getty Images
The ability to pay for health-care needs is one of the most critical issues of retirement.

Keep that in mind as you approach age 65. Even if you're still working, you may be required to sign up for Medicare (with your employer's plan as secondary coverage), depending on the size of your employer and the kind of health plan you're on, Stahl said. Claiming Social Security also by default enrolls you in Medicare Part A, he said.

Delay those enrollments if you can; or, at least, plan your HSA contributions accordingly.

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