Retirees Should Consider Health Savings Accounts

Underrated health savings accounts have plenty of benefits.

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Robert Schmansky
Robert Schmansky

According to a 2013 study of employee retirement savings, health care concerns are driving many to cut retirement contributions and seek ways to save more for future health care costs. Mercer’s workplace study finds preretirees may cut back on retirement contributions by 10 percent in 2014 and due to a lack of trust in future health care benefits, these same workers may be putting those savings into health savings accounts, combined with high-deductible health plans or plans which have a deductible minimum of $1,250 for individuals and $2,500 for families.

The study shows more employers are offering the high-deductible health plans and more employees are taking them up on those plans, which allow employees to establish health savings accounts that either they or their employer may put money into to pay for future health care costs. With the ongoing changes to health care, some pundits have speculated that trend is likely to continue to show strong growth in health savings accounts.

While employees may be making these moves due to concerns about future health care costs, they may actually be contributing to a better overall retirement savings plan than they realize. Health savings accounts provide a vehicle to save for health care and have some significant retirement savings benefits over a traditional plan to only save to a 401(k), 403(b) or other employer-based plans.

Hospital bed

Health savings account benefits include:

Savings can be used tax-free preretirement for qualified medical expenses for yourself, spouse or dependents, even if they are not covered under the high-deductible plan. Otherwise savings are tax-deferred until withdrawal. At 65 years old, you will avoid a 20 percent penalty even if not used for medical expenses. The increased flexibility over IRAs, 401(k)s and other retirement savings accounts shows why some savers may be shifting their contributions from traditional retirement vehicles. It is important to note that while there has been an increase in the coverage provided for children until age 26 under most health insurances, that health savings account withdrawals only avoid penalties if used for children who are dependent, which can be a very difficult hurdle to clear for those whose kids are out of school or over 24 years old.  

Employer contributions to your health savings account may be tax-free, while your contributions receive a tax deduction. High-income earners are often limited in how they can save on a pre-tax basis, and given the reductions and increases in phase-outs of many tax deductions, exemptions and credits, even if you have to contribute a portion to your health savings account, there are no income limits to receive a deduction. For 2014, the maximum contribution amount for individual coverage is $3,300 and for family coverage is $6,550. There is a catch-up contribution of $1,000 if the owner of the account is 55 years old or older. Take note of the fact that contributions are no longer allowed once you are enrolled in any Medicare plan.

You get to keep your current excess money that is being put toward premiums. One of the overlooked benefits of high-deductible plans with health savings accounts is that many rarely use the benefits of their insurance beyond annual check-ups or other visits. If you are allowed to direct your benefits in a cafeteria plan, the money currently being spent on insurance benefits you don’t use can go into an account for you rather than going to an insurer. It may take months or a few years of saving before you cover the deductible, but that money is yours to use as you need to.

You can invest this money as you see fit. Have a bad 401(k) plan? You’re out of luck. Have a bad health savings account? You can transfer it to a better provider. Have a decent chunk of change in your health savings account? You can invest it for longer-term growth. The options of what you can do with your health savings account are not limited to the default plan your employer chooses for you, unlike your 401(k), 403(b) or other retirement plan. Neither is your money is locked away; if you need to access it for any reason and it is worth paying tax and a 10 percent penalty, it is accessible to you.

It is important to understand that you are not eligible for a health savings account if otherwise covered by insurance or any Medicare plan. Is a high-deductible health plan combined with a health savings plan strategy a fit for you? Although we can never know when a medical emergency may strike, if you are healthy, they may be worth considering. While the young are traditionally thought of as great candidates, as they tend to consume less health care, many high-income earners, as well as those who generally do not consume much in health care, may also benefit from a health savings plan. One of the unique social benefits of health savings account plans is that they make us all acutely aware of the cost of the health care that we consume.

Although many people would prefer not to know what that cost is, controlling skyrocketing costs is one way to deal with the fear that is driving the move to health savings accounts to begin with. By paying for health care directly, at the consequence of spending limited health savings plan dollars, consumers may question more about their health care provider’s costs and recommendations. This simple process of becoming aware of cost and checking competitors prices encourages entrepreneurs to develop better delivery methods and makes the marketplace in general more efficient.

Robert Schmansky is an independent financial advisor and founder of Clear Financial Advisors in Livonia, Mich.. Rob has over a decade of experience in retirement planning and investment strategies.

Corrected on 12/13/2013: A previous version of this story misstated the penalty for premature distributions.