In 2016 more than 20 Million Americans were covered by High Deductible Health Plans that allow their enrollees’ access to Health Savings Accounts (HSAs). That’s around 6.5% of Americans, and what this allows them to do is set aside money tax free to pay for their medical expenses.
If you remember hearing about HSAs recently, that’s because in May there was talk about substantially expanding the availability of them and massively increasing the limits of contributing to them, although that didn’t end up happening in the end.
HSAs can also be used as retirement savings vehicles but they’ve got disadvantages and can be inflexible, so let’s look at that for a moment.
The best thing about them is that you don’t need to pay out a certain about after you reach 70.5 years old like you do with other kinds of retirement vehicles. Also, most healthcare costs (and healthcare in later years is expensive) are tax free when you pay for them with money out of a HSA.
There are severe limitations on HSAs though. First off, as we mentioned, you can only use them if you’ve got a high deductible plan, which means healthcare costs that you do have would be more expensive. Second, there are literal contribution limits. This year, they’re $3,400 for an individual and $6,750 for a family (and that goes up by $1,000 for people over 55.) You also have to stop contributing to your HSA when you reach retirement age.
They also have fewer investment options, so if that’s your primary concern, these accounts probably aren’t for you either.
Then there’s the withdrawal penalties, which are different for HSAs than for everything else. It doesn’t matter how old you are, if you withdraw money from an HSA and don’t use them for a qualified medical expense, it becomes taxable. In addition, if you withdraw for a non-medical reason prior to 65, there’s an additional 20% penalty. That’s a lot.
401(k)s and IRAs end their penalties at 59.5 years old and their additional penalties are 10% anyway.
So if you’re healthy enough to not need a lot of healthcare right now, but your family will probably need a lot of healthcare costs as you age, these accounts might work for you. Generally though, as an investment vehicle, there are probably better options out there. A good financial advisor may make a case for you specifically though, so find a good one. Or let us suggest one of the ones that we work with.