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NAPA 401(k) Summit
NAPA 401(k) Summit

HSAs Over 401(k)s for Retirement Readiness?

Health Savings Accounts can play a far more important role in retirement planning than they currently do, according to a group of advocates at the National Association of Plan Advisors annual summit.

The benefit of using Health Savings Accounts (HSAs) as a component of “holistic” retirement planning was a main theme at the National Association of Plan Advisors annual meeting in Las Vegas on Monday.

The tax-advantaged investment accounts are flexible enough to grow tax-free money to help handle participants’ biggest single expense in retirement: healthcare. If not needed, the money can be withdrawn after age 65 and taxed as ordinary income.

Too many still consider HSAs a health insurance add-on, handled through benefits department and basically held as a "cash-in-cash-out” account to pay for annual medical expenses, said Matt Clarkin, president of Access Point HSA. “The impression that this is an account that should not be rolled over is a misunderstanding. That’s missing the long-term power of the HSA.”

“It’s the biggest jump ball no one has cared to jump to,” says Ryan Tiernan, a national accounts manager with American Funds. “HSAs are probably the most efficient way to save and invest for your biggest expense in retirement.”

HSAs are offered to employees in high-deductible insurance plans. The annual pre-tax contributions ($3,400 for individuals or $6,750 for a family) can be invested and tax-free money withdrawn at any time for medical costs. Unused portions of the account can rollover to the next year and investment growth can continue indefinitely. The benefit for retirement savers is this: if not needed for medical expenses, withdrawals after the age 65 are not subject to a penalty but taxed as ordinary income, just as any withdrawal from an IRA, and accounts can be passed on to a spouse after death. The investment options for an HSA can mirror that of a 401(k).

Advisors that are bringing HSAs into the retirement planning process usually recommend participants fund a 401(k) up to the corporate matching level, then fund the HSA, said Sam Brandwein, the outgoing president of NAPA and a Morgan Stanley advisor. Once the HSA contribution level has been reached, go back to funding the 401(k).

During the NAPA conference here, advisors were asked, given what they know about the benefits of HSAs, if a 65-year-old would rather have $500,000 in the health account or $500,000 in a 401(k). 70 percent chose the HSA.

These accounts are expected to grow under any health care legislation that Republicans can pass. In the current American Health Care Act, contribution limits to HSAs would double to $13,100 for a family and $6,500 for an individual, and expands qualifying expenses to include health insurance premiums, over-the-counter medications and preventive health costs.

Additionally, under the Republican plan, unused health insurance credits can be contributed to an HSA. The idea that we could have “tax credits that can be deposited into a tax-advantaged account has never happened before in American tax history,” said Kevin Robertson with HSA Bank. Whatever final shape the health care reform package takes, he said, “the political winds are behind HSAs.”

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