That other retirement account: Financial planning for HSAs

Health Savings Accounts (HSAs) may be the best deal out there, if you can get it. All of us like to beat the tax man, right? HSAs are what’s known as triple tax free: you get a deduction when you put money into the account, the account grows tax free, and as long as you make withdrawals for allowable health care expenses (pretty easy to do), you don’t pay any tax on that either. They’re like a traditional IRA or 401k going in, and a Roth coming out.
But like many good things, there are a few problems and things to watch out for:
1) I’ve probably repeated this for the millionth time now, but you don’t have to pay yourself back for the medical expenses in the year you spent the money. You can accumulate the receipts (and carefully file them so you can find them) and withdraw them in any year, as in when you actually retire. You’ll have to be able to pay your deductible and out of pocket costs out of pocket, but if these are fairly low, you can keep the HSA invested.
2) As with every financial account, watch the fees. Some accounts ding you heavily if you don’t keep a minimum balance. Some charge you a monthly fee. Some employers will pay fees while you’re employed with them, but if you leave they stop paying the fees and the account starts getting bites out of it. If this is the case, you can rollover your HSA into a servicer with different (hopefully, better) rules.
3) It doesn’t do you any good to park it in a savings account paying half a percent. In this case, woohoo it’s growing tax free. But the growth is infinitesimal. You want an HSA that allows you to transfer the bulk to a brokerage, or at least invest in mutual funds. Even if you still work for the same employer as when you deposited the funds, you can rollover the account (or most of it) to a provider of your own choosing. Be sure you carefully check fees and options at your current account, and at the one you are thinking of opening.
4) If you are working with an investment advisor, you may want to consider whether the HSA should be invested as part of your overall portfolio strategy. If it’s going to be untapped for years, it should be managed to build wealth.

Once you’re retired, it’s probably a good idea not to hoard that HSA. If you leave it to your spouse, it becomes their HSA. But for any other heir, it’s a lump sum distribution that they will have to pay taxes on.

So, how do you use it up? Well, of course you can submit those hoarded medical expenses you’ve saved. You can also use it to pay premiums for long term care insurance, premiums for Medicare Part B and Part D (drug), vision and dental care not covered by Medicare supplement insurance, and any copays and deductibles. You cannot use it to pay supplemental or Medigap premiums.

Since these accounts do not usually grow extremely large, it seems to me that it would be pretty easy to use it up during a normal retirement. It’s a nice way to build up a war chest for unexpected medical expenses that crash retirement budgets. Too bad I can’t use it for veterinary bills.

About the author

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Danielle L. Schultz, CFP®, CDFA

Danielle L. Schultz, the principal financial planner of Haven Financial Solutions, is a CERTIFIED FINANCIAL PLANNER™ (CFP®), a NAPFA-registered Financial Advisor, and a Registered Investment Advisor in the State of Illinois. She studied financial planning at Northwestern University’s Certified Financial Planner™ certification program. She also holds a Series 65 license (Registered Investment Advisor Representative) and a CCPS (Certified College Planning Specialist).

She writes a regular column for Better Investing magazine and is currently working on a revision of their mutual funds handbook. In addition to academic training and professional experience, Ms. Schultz has personally managed Social Security, Medicare, retirement and long-term care issues; college funding concerns; and cash flow and transition planning in self-employment and divorce situations. Her social work background gives her an innovative perspective on financial planning issues; for her, financial planning is not only about money, but also a key component in a satisfying and well-lived life.

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