Health savings accounts : The intersection of retirement and health care

Healthcare planning, or the lack thereof, can directly impact your retirement for the better or worse. Please see below article by Kevin Murphy, National Retirement Plan Strategist at Franklin Templeton, where he explains the benefits of Health Saving Accounts, and how they can even help build your retirement savings.

Health savings accounts : The intersection of retirement and health care

The increasing costs of health insurance borne by employees and employers alike has spawned a variety of plans and strategies to help manage the expenses. Among these are health savings accounts (HSAs), which first came onto the scene in 2003. HSAs allow individuals who are covered by high-deductible health plans to receive tax-preferred treatment of money they have saved for medical expenses. Kevin Murphy, National Retirement Plan Strategist at Franklin Templeton, explains the benefits of HSAs, and how they can even help build your retirement savings.

Every year Franklin Templeton conducts its Retirement Income Strategies and Expectations (RISE) survey,1 asking individuals how prepared they are for retirement, the strategies they have used to save for it and what concerns them most about their post-work life. Concerns about health care expenses often top the list of worries among survey respondents. In fact, in the 2018 RISE survey, paying for medical and pharmaceutical expenses was the number one expense individuals were concerned about in retirement. And that’s no surprise, as health care planning—or lack thereof—can directly impact one’s retirement for the better or worse.

The ABCs of HDHPs and HSAs

High-deductible health plans (HDHPs) have been one solution to help employers and employees cope with rising health care costs. Along with traditional health care plans, increasing numbers of employers have been offering these plans, which can provide greater upfront savings to the employer than traditional plans, and significantly lower premiums for individuals. As the name implies, an HDHP has a higher deductible than a traditional health insurance plan. The individual is responsible for paying medical expenses up to a specified level. After meeting the deductible threshold coverage kicks in. Certain aspects of care may be covered in full outside the deductible, such as yearly exams and preventative care.

A Health Savings Account (HSA), which is used in conjunction with an HDHP, allows users to save money tax-free to pay for qualified health care expenses paid out of pocket and, HSAs can be used for health care expenses not only in one’s working years, but also in retirement. In this sense, the HSA represents the intersection of retirement and consumer-driven health care.

The main advantages of an HSA

There are three main advantages of an HSA.

• Contributions are not subject to income tax.
• Earnings and interest grow tax-free.
• Withdrawals are tax-free if used to pay for qualified medical expenses.

As HSA participants direct where to invest the funds (which can include vehicles such as mutual funds), HSAs are often thought of like an Individual Retirement Account or 401(k) plan for medical expenses, and a great complement to these long-term retirement savings strategies. Both offer tax-deductible contributions, but the main difference is that while most individuals won’t touch their 401(k) assets until they retire, it’s more likely individuals will need to access their HSA savings periodically before then.

No one-size-fits-all approach

When it comes to health care coverage, what’s appropriate for one individual or family might not be appropriate for another. If you choose an HSA plan, you’ll want to give careful consideration to how your assets are invested based on your personal situation, including your risk-tolerance, needs and goals.

Of course, there are always trade-offs with any type of health plan, and I certainly would not want to imply an HSA is right for everyone. It’s important to weigh the pros and cons. But, if you are healthy and can afford a higher deductible, an HSA can also help build your retirement savings.