It shouldn’t come as a surprise that health care and rising health care costs are one of the top concerns for most people. Today, 89% of employees say having health insurance contributes to financial security, and 73% mentioned health insurance as a top-three reason when contemplating a job change.1
Health Savings Accounts (HSAs) have been around for over 15 years, and their usage has grown steadily. Fidelity found that assets in HSAs topped $3 billion in 2018—double the amount from 2017.2 HSAs are popular savings vehicles because they offer triple-tax advantage:
While most people may think of HSAs as short-term savings tools to self-fund current medical expenses, you can also use them as a long-term savings and investing tool. Funds in your HSA roll over each year, and even if you leave your job you can keep your HSA. Similar to a 401(k) or an individual retirement account (IRA), you can keep your HSA with your old plan provider or roll it over to a new one.
You can think of HSAs like IRAs in that you can invest your HSA balance to grow your account for future needs. For instance, once you retire, you can continue to use your HSA balance for Medicare deductibles, prescription drugs, and other medical costs. Read more about how you can prepare for health care costs in retirement.
So, let’s say you have managed to save up a significant amount in your HSA. For example, if you are over age 55 and contributed the maximum for a family since 2004, your HSA balance would total over $113,000. Additionally, if that balance was invested and earned 7% annually, that balance would be just over $204,000. But what happens to the remaining HSA balance after you pass away? The beneficiaries on your account will determine what happens to your HSA, and whether it’s a favorable inheritance vehicle.
Ideally, if you have an HSA, once you retire you should try to spend down your account balance as much as possible. Again, you can continue using your HSA account during retirement even if you have Medicare (though you can’t contribute to your HSA once you’re enrolled in Medicare). Also, if you need long-term care or have a chronic illness, you can use your HSA to pay for these medical expenses.
If you expect to have a balance remaining in your HSA at your death, then there are a few ways to help optimize your HSA account for non-spouse beneficiaries.
Health savings accounts provide a great tax benefit, and we encourage taking advantage of HSAs as part of your long-term savings strategy. Invest your account balance and allow it to grow until retirement without taking distributions, if possible. Talk to your advisor about how an HSA might fit into your wealth management plan.
The IRS publishes a list of items that can be used with your HSA. While it’s good to have this guidance, make sure you check with your HSA provider to confirm what expenses are covered in your plan. Here are some covered medical expenses:
Want to learn more about long-term care? Consider these other resources:
Planning for Health Care Costs in Retirement
Deciding to Retire?
Building Your Framework for Retirement
Supercharge Your Retirement Savings
1 “The State of Employee Benefits: Findings From the 2018 Health and Workplace Benefits Survey,” Employee Benefits Research Institute and Greenwald & Associates, 1/10/19.
2 “Fidelity Finds Little Knowledge About HSAs,” Plan Sponsor, 6/14/18.
Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate, but is not guaranteed or warranted by Mercer Advisors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors. Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy or product made reference to directly or indirectly, will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. Changes in investment strategies, contributions or withdrawals may materially alter the performance and results of your portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. This document may contain forward-looking statements including statements regarding our intent, belief or current expectations with respect to market conditions. Readers are cautioned not to place undue reliance on these forward-looking statements. While due care has been used in the preparation of forecast information, actual results may vary in a materially positive or negative manner. Forecasts and hypothetical examples are subject to uncertainty and contingencies outside Mercer Advisors’ control.