According to some estimates, a relatively healthy 45-year-old who plans to retire at 65 should expect to pay retirement health care costs of almost $600,000 – and that’s at today’s rates; inflation projections put that amount at $1.6 million. Can you – and your employees – afford that?
One study suggests that the answer is a resounding no; the average American couple, just 10 years away from retirement, only has $17,000 saved up. And all signs point to the fact that Social Security benefits won’t keep up either.
So what’s the solution? One massively overlooked answer lies in Health Savings Accounts (HSAs). At Synergy, we see a huge benefit in using HSAs as retirement accounts. Here’s why.
Educating your employees about HSAs is critical. HSAs are savings accounts that help people pay for out-of-pocket medical expenses that aren’t covered by insurance. An employee’s contributions to the account are pre-tax, and any unused balance is rolled over every year. Although it is usually set up by the employer, it is entirely employee-owned, which means they won’t lose it if they are terminated.
Employees are eligible for Health Savings Accounts if they have High Deductible Health Plans (HDHP). An HDHP plan is one that meets the minimum deductible of $1,300 for individual or $2,600 for family. Their HSA contributions must not exceed $3,350 for individuals or $6,750 for families. Withdrawals from Health Savings Accounts are tax-free if used for medical expenses.
Some studies estimate that as many as 80% of HSA holders make withdrawals every year for medical expenses. Although that is the intended purpose of the account, there might be a smarter way.
If your employees are healthy and have other sources of saved income to cover current medical expenses, using HSAs as retirement accounts is an intelligent alternative. The primary reason for this is the triple tax benefit they’ll experience:
Medical expenses will always be tax-free when making withdrawals. However, if an employee continues to contribute to the account throughout their career, at 65-years-old they can make withdrawals for any expense; the withdrawal will simply be taxed as income, just like a traditional IRA.
Thus, if an employee is already maxing out contributions to their employer 401(k) and their personal IRA, the HSA provides a third option for growth-oriented retirement savings. And even if they’re not maxing out their other retirement accounts, saving money through HSAs for future-oriented health expenses is also a smart move.
HSAs can be invested in mutual funds and stocks, but many default to a regular old FDIC-insured savings account, earning minimal interest. However, since the account is 100 percent employee-owned, employees can shop around for accounts that can be invested for more significant long-term return.
In this scenario, employees should be aware that HSAs don’t fall under the same regulations as 401(k)’s in regards to transparency about account fees, investment fees, and transaction fees. They need to ensure they’re getting all the details if they choose to rollover their account to one with investment options, as well as the specific funds they’re able to invest in.
Finally, employees should know that they are able to withdraw from an HSA account before the age of 65, but they would incur a 20% penalty on top of regular income taxes. That’s because, at the end of the day, whether you’re using the account of current medical expenses or future ones, it’s still designed to help people make smart financial choices.