HSA As a Retirement Account?
When I attended the meeting at my spouse’s employer about the changes to their health insurance plans, the other thing that was discussed was the Health Savings Account, or HSA. I will be the first to admit that before this meeting, I had heard the term HSA but had not really understood what it meant or what it was, so this was all very new to me.
The HSA was explained as a money market account, administered through a particular local bank (the bank’s rep was who explained it to us), that we could have money deposited to directly from our paychecks, pre-tax, and it could only be used for health-related expenses. It would work like a checking account basically, in that we could have checks and a debit card for it and pay our health expenses directly from that account. Any unused money each year would automatically roll over to the next year, unlike a flexible spending account like we have now, where contributions are taken pre-tax but if you don’t use them in that year, you lose them.
All that I understood. But then it got interesting. The rep really tried to sell the HSA to us as another retirement account. Yes, the money goes in pretax. Yes, we can take it out for medical expenses pretax. And after 65 years of age, you can take out the money for any kind of expenses and only pay ordinary tax, no penalties. But… really? A retirement account? The one they were offering earns almost no interest. How is that a good idea?
Maybe there are lots of options, maybe you can create your own HSA in a better account or something (it was not at all presented that way) - but still then, it isn’t going to outperform something like an IRA or a 401K I would think. You do get to withdraw the money with no tax penalty for medical expenses, so maybe that’s the retirement advantage? I would think though over the long term, the loss of interest would outweigh the tax advantage. but maybe I am wrong.
Because everyone else in the room seemed to be nodding along and agreeing that this was an excellent retirement investment vehicle. And these were not incredibly wealthy people who have run out of other places to save for retirement. These are average people who for the most part I doubt make enough money to max out a 401K and an IRA every year no matter how much they save. So what gives? Is there a huge key I am missing? And if not… is it ethical for the HSA to be “sold” that way, as a retirement investment?
I did say a little knowledge for me is a dangerous thing… maybe this is one of those cases.
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November 2nd, 2007 at 6:26 am
So I’m under the impression that you could invest your HSA money in vehicles that are riskier and more likely to make money than an MMA. Still, I think it would only make sense if 1) you have cash to hide from the IRS and 2) you’ve maxed out your 401k and your Roth. Then it would make sense to start saving for specific health costs. I still haven’t seen an HSA that would make sense for frugal folks who aren’t high income.
November 2nd, 2007 at 10:25 am
You most definitely can save money in a health savings account in another type of fund besides just a money market. The idea of the money market is to not have losses. If you are market savvy and don’t mind the risk, other funds may be used. The HSA should NOT be sold as a retirement account, but definitely as a means to cover medical expenses which may be subject to a deductible in your plan. It can also be used for copays, prescription copays and hospital copays. With that said, any money not spent for medical expenses could certainly augment retirement! Please go to my blog, The Kaighn Report, read a few and give me a comment. It would be appreciated!
John Kaighn
Jersey Benefits Advisors
Plug In Profit
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November 2nd, 2007 at 11:16 am
“everyone else in the room seemed to be nodding along and agreeing that this was an excellent retirement investment vehicle.”
People are sheep and thus, usually dumb. Please note that I didn’t say a person was, but people are. There’s something that happens when you throw a normally intelligent person into a a group of people. In your situation, they have an “expert” telling them something and none of them wanted to look like they didn’t understand and wanted to appear knowledgeable.
While you may be able to use this account as a retirement account, it doesn’t make sense, unless you’re maxing out all other options. But even then one has to wonder why not just do after tax investments. Yes you pay capital gains etc, but if the ROI is better than 0, it is better. This account is for HEALTH CARE, and nothing more. While it may not seem right for this agent to be pushing it as a retirement vehicle, it can probably be used as one, and the person there was doing what they get paid to do, buy into the plan.
November 2nd, 2007 at 4:29 pm
What mjmcinto said. Or if you’ve just got leftover money in the HSA and happen to want some of that money after retirement. It sounds like term life (no interest), except that some commenters are saying you can invest it. Still doesn’t seem like the way I’d go.
Well, I think HSAs are cool, but for health.
November 2nd, 2007 at 8:42 pm
I agree with the last two posters. Everyone has heard by now that the general population is not saving enough for retirement, so when someone hears the word ’save for retirement’ they are automatically interested. If they aren’t saving already, they probably think that this HSA is the way to go 1) because it’s through work and 2) they don’t have to do anything except sign up, and 3) the representative HAS to know what they’re talking about. I would stick with the flexible spending, and perhaps eventually you can participate in this HSA, but by the time you’re ready to invest in the HSA, you’ll know more about other savings vehicles which will actually earn you money, and you’ll be surprised that you gave it a second thought. That’s my wish for you, anyway.
November 2nd, 2007 at 10:20 pm
I think it’s not so much a retirement vehicle, but I might be tempted to start one–knowing that the money is there for a medical emergency, but I won’t lose it if I’m lucky enough to live a healthy life. I generally don’t contribute to the other tax-sheltered medical fund my company has, because it’s a “use it or lose it” proposition. If I knew I wasn’t going to lose it, I’d probably use the benefit.
November 3rd, 2007 at 12:05 pm
Thisisbeth-I’m going to participate in my flexible spending account this year for the first time, and I think it will be helpful. I go to the doctor’s once a year (the girl doctor), and I know my copay is 20.00. I also get birth control and that’s 120 dollars (per year). I’m going to put 150 in my account in case I need new glasses or contacts or go to the dentist. If at the end of the year, I’m down to 30.00 in my account, I can use that money for over the counter medicine (i.e.cold medicine, band-aids, Advil, or Rolaids). Having the option to buy stuff in the grocery store sold me on having the account. Figure out what you usually spend on medical stuff, and then underestimate a little so you know that you won’t lose your money at the end of the year. Any way to reduce my gross income according to the IRS is a good thing.
November 3rd, 2007 at 2:59 pm
Another important aspect of having an HSA is that is MUST be used in conjunction with a high-deductible healthcare plan (HDHP), with a minimum of around a $1,000 deductible. The reason many companies go with the HDHPs is that they are much cheaper for both you and the company than regular healthcare plans.
If you are pretty healthy and only go in for a yearly checkup, the HSA is a great way to save money. Even if you do use your healthcare facilities often, having an HSA is a good way to use pre-tax dollars for healthcare expenses. For my HSA, the “core” money is in a money market account, and any unused dollars over $1,000 can be invested in mutual funds. I have a few posts on our site detailing HSAs and how I save money with them.
November 3rd, 2007 at 6:40 pm
Wow, I really misunderstood HSA. I was confusing this with Health Care Account (HCA). Looks like I have to go back and re-read the difference and crunch some numbers again.
November 3rd, 2007 at 6:55 pm
The funny thing is - our traditional plan almost qualifies as a HDHP - the family deductible is just $200 too small. Scary.
I have nothing against HSAs in general. How this was presented to us, it sounded like I would have to use the bank the company chose to do my HSA. is that true? probably not, but would the company then still give me the $700 in my account? that i don’t know.
I didn’t ask specifically because since I already decided it would cost us more, I didn’t go for it.
I use a flexible spending account to keep my health care expenses in pre-tax dollars and for us it works. We’ve never had money left over by the end of the year but if for some reason we did, I’d buy a bunch of over-the-counter stuff to meet the amount, or get new glasses.