Health savings accounts: Not your parents’ retirement plan
With the rise in health savings account (HSA) enrollment among younger employees and the decline in company matching rates of 401(k)s, HSAs have emerged as a retirement account option for new employees. In this guest post, Sean Hanftm, a flexible compensation specialist with FSAstore.com/HSAstore.com, explains the many benefits of these savings vehicles and compares them to the most popular retirement accounts.
You’re young. You’ve just graduated college and have your first “real” job. You have the world in front of you. Retirement is the farthest thing from your mind because, let’s face it, that’s a lifetime away. And so it goes, younger workers continue to lag in their savings habits, particularly when it comes to long-term savings.
In fact, a census data report in 2014 showed 66 percent of millennials have absolutely nothing saved for retirement (CNN Money), and this doesn’t include many more who may be saving but are far behind in their retirement goals.
As with most things, the new workforce is breaking the mold and shifting the workplace paradigm. Numerous studies exist that explore the psyche of the millennial and Gen Z workers, as employers and human resource professionals strive to attract and retain top talent from this generation that will dominate the workforce for the foreseeable future.
Ironically, millennials and Gen Z employees have more options than ever when it comes to retirement savings. Where older workers may be more likely to pursue 401(k)s and other traditional retirement plan options, younger millennials and Gen Z have sparked a growth in health savings account (HSA) enrollment and may have improved their retirement potential in the process.
According to The State of Employee Benefits 2017 report, published by employee benefits firm BenefitFocus, the number of eligible millennials under age 26 enrolling in an HSA rose by 40 percent in 2017. The same study found that millennials increased their HSA contributions by an average of $200 in 2017.
An HSA is an attractive savings option because it can provide an immediate boost to your retirement earning potential, while letting you cover immediate healthcare costs. HSAs were created in 2003 and are similar to flexible spending accounts (FSAs) in that they’re funded with pre-tax dollars, and subject to yearly contribution limits (2018 limits are $3,450 for individuals, $6,900 families). However, HSAs have additional benefits, including:
? Rollover of unused funds from year to year
? Triple-tax savings (contributions, interest and withdrawals for health expenses are not taxed), and
? Ability to invest a portion of unused dollars in mutual funds and other long-term savings vehicles.
HSA funds can even be used to pay for copayments, prescription medicines and thousands of over-the-counter medical products.
Where HSAs really pique the interest of millennials is in their long-term retirement potential. HSA funds can be used tax-free for qualifying healthcare expenses, but if you withdraw this money and use it on a non-medical expense, it’s subject to a 20 percent tax penalty. But once you reach Medicare age at 65, you can withdraw that money without a tax penalty and it is just taxed as income. So, not only can working professionals fund an account to cover health expenses, any remainder can be used to fund the user’s retirement in the future.
A comparison of retirement savings options
Can an HSA really be a standalone retirement option for millennials? Not on its own. Let’s examine how HSAs stack up against the earning potential of the most common traditional retirement plan options over the course of a young professional’s career.
For this exercise, we’ll consider an unmarried professional who begins saving at age 30, contributing the HSA maximum ($3,450) annually in 2018.
- HSA: With an annual contribution of $3,450 (2018 limits) that earns 2% interest rate — $176,568.00 (after 35 years)
- 401(k): With a starting salary of $50,000, a contribution rate 6.9% ($3,450/year), an average salary increase of 4% an average rate of return of 7% and a 0% employer match — $803,051 (after 35 years)
- Traditional IRA: With an annual contribution of $3,450 and average rate of return of 7% — $510,301 (after 35 years)
The takeaway
While HSA enrollment rates are taking off and their retirement savings potential is finally getting the attention it deserves, HSAs should be seen as more of a supplemental retirement option rather than a primary solution to long-term savings. There’s certainly more fluctuation in the aforementioned numbers for avid investors looking for a larger return. But for those who want a simple, long-term savings plan with little hands-on management, retirement accounts like IRAs and 401(k)s are still the best options for long-term savings.
It’s important for millennials and Gen Z employees to understand that, while HSAs won’t provide the major retirement windfall they may have hoped, enrolling in a qualifying high-deductible health plan with an HSA is still a valuable addition.
Ease of use
Employees of all ages, but in particular millennials and Gen Z employees, are looking for online options to manage all aspects of their lives and to connect the disparate areas of their lives in an effort to streamline and simplify. Numerous online HSA tools exist for this purpose, including those that allow account holders to select the best HSA for their needs, to estimate their long-term HSA earnings, and to manage their HSA utilization and investments.
Sean Hanft is a flexible compensation specialist with FSAstore.com/HSAstore.com, companion websites dedicated exclusively to consumer education and selling products that are eligible for reimbursement with an FSA or HSA.