Investor Toolkit

Millennials: Here's what to consider before you dive into a health savings account

Key Points
  • Three-quarters of millennials eligible for a health savings account have enrolled in one, according to Benefitfocus.
  • HSAs can be a great vehicle for retirement savings and, in the short term, as an emergency account alternative.
  • But before you switch into a high-deductible health plan to use an HSA, experts say, it's key to review coverage to make sure it's a good fit.

Adopting a health savings account as a young worker could be a smart financial choice. But look before you leap.

Millennials' participation in HSAs has jumped in recent years.

In 2018, 76 percent of those eligible had enrolled in an account, up from 40 percent in 2017, according to a recent report from benefits administrator Benefitfocus. That's a bigger jump than in any other generation (although millennials still lag behind Gen Xers and baby boomers in HSA adoption).

Financial advisors say picking a high-deductible health plan with a health savings account can be a smart way to save for retirement (and future health-care costs).

The high-deductible plan premiums are less expensive, and the associated health savings account has a triple tax advantage: Contributions are either pretax or tax-deductible, typically grow tax-free and can be withdrawn without incurring taxes when used toward qualified medical expenses.

"There's a huge opportunity if you're putting away a few thousand dollars a year in your 20s and 30s, what that can grow to," said certified financial planner Sophia Bera, founder of Gen Y Planning.

Health savings account: A great 401(k) alternative
Health savings account: A great 401(k) alternative

Over 40 years of saving, HSA contributions could tally $360,000, according to a 2014 estimate from the Employee Benefit Research Institute. That assumes the participant saves the maximum each year, takes no withdrawals and earns just a 2.5 percent rate of return.

But it's worth noting that most workers aren't modeling such ideal behavior. A 2017 EBRI report found that in 2016, only 13 percent of HSA accountholders made the maximum contribution, and just 3 percent invested their assets in something other than cash. And most make withdrawals, although two-thirds of accountholders ended the year having contributed more than they withdrew that year.

Deciding: Would you benefit from an HSA?

Before you jump into a high-deductible plan to use an HSA, consider how you use the health-care system, said CFP Carolyn McClanahan, director of financial planning for Life Planning Partners.

"The people who tend to do best with HSAs are the people who rarely access healthcare, or who always hit their plan's out-of-pocket maximum," said McClanahan, who is also a medical doctor.

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Those extremes typically mean participants will cut costs one way or another with a high-deductible plan, freeing up cash that could be used for HSA contributions or allowing them to leave such contributions untouched.

Compare costs for your health-care needs under all the plans available to you. Some potential pain points:

  • Networks. Check to see if your preferred doctors, hospitals and other providers are in or out of network, said Bera at Gen Y Planning. That classification can make a big difference in your bottom line, especially if you have ongoing care needs. (For example, one of Bera's clients decided not to switch into her workplace's high-deductible plan after discovering that it would treat one of her child's regularly visited specialists as out of network.)
  • Prescriptions. Estimate the cost for your recurring prescriptions, such as insulin or asthma meds. Coverage and costs can vary, again, making a big difference in your tab.
  • Upcoming changes. "Take a look at, are you anticipating any big out-of-pocket health expenses in the next year?" Bera said — for example, having a baby or starting fertility treatments. Factor those additional costs in when you're comparing coverage options, with an eye to coinsurance and out-of-pocket maximums.

You have an opportunity to switch plans annually with open enrollment, so reassess your options every year, said McClanahan at Life Planning Partners. (But keep in mind that you can only contribute to an HSA in years when you have an eligible high-deductible plan.)

Making the most of an HSA

"The biggest mistake I see people make is, they don't fund their HSA," said McClanahan.

Ideally, aim to max out your contributions for the year, and invest those funds rather than keep them in cash. (For 2018, the limits are $3,450 for individuals and $6,900 for families.) Check to see if your employer offers a flat contribution or matching funds, said Gen Y Planning's Bera.

"More and more companies are incentivizing their employees to choose the high-deductible plan by putting money into your HSA," she said. "So I would encourage people not to miss out on that money."

Pick the right HSA provider, McClanahan said — particularly, look at the investment options and the fees to make sure they're a right fit for how you'll use the account. Consulting firm Devenir offers a comparison tool of more than 500 providers at

Try to pay in cash for any current out-of-pocket medical expenses so you can leave that HSA balance intact. But save your receipts, Bera said — you can redeem those expenses down the line if necessary as an emergency fund alternative.

The HSA can also become a hedge against an unexpected medical expense or illness.

"For a lot of young clients, besides a job loss, a lot of times a medical emergency is a thing that would cause them to have to tap their emergency savings," Bera said.