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HSAs are often touted as vehicles for retirement savings but recent reports show they are falling short of the mark.


Instead, HSA account holders are relying on their accounts to fund current healthcare costs.

And, who can blame them? With out-of-pocket costs increasing, it’s hard for many people to find another source to cover their cost-sharing burden.

HSA contributions are trending up but not because of investment opportunities. 

While people are dipping into their accounts, the overwhelming majority don’t deplete their HSA balance in any year, which means funds are rolling over. But even though 95% of HSA account holders are ending the year in the black, balances are creeping up slowly.

Balance increases are mostly the result of contributions and not returns. A mere 4% are investing any portion of their HSA.  

And, that means there’s lots of room to raise the bar, especially for those employees nearing retirement.

HSA triple tax advantages are a great way for retirees to save more. 

With their shorter time horizon to retirement, it might seem counter-intuitive that HSAs could be a boon for employees over 55. But there are two reasons why they offer a serious saving opportunity: the triple tax advantages and the catch-up contribution.

Because they will be using their HSA dollars for retirement healthcare costs sooner than younger employees, the value of those dollars on distribution is important and should be top of mind. Even without investing any of their HSA balance, older employees will withdraw HSA dollars 1:1, unlike 401(k) distributions which are taxable.

401(k), Roth 401(k) and HSAs...oh my! 

Let’s assume employee A is 55 years old. She has $100,000* in her 401(k). $50,000 is pre-tax dollars and $50,000 is Roth dollars. This year, she maximizes her HSA for family coverage and contributes $8,000 ($7,000 plus $1,000 catch-up).

How does contributing to and taking distributions for healthcare costs from an HSA compare to saving in a traditional 401(k) or with Roth? If employee A is currently in a 22% tax bracket and continues in that same bracket during retirement, here’s the difference.

  • $8,000 this year in a traditional 401(k) reduces her taxable wage base and saves her money on her 2020 taxes. However, when she later withdraws the money since 401(k) distributions are taxable, she would owe $1,760, reducing the value of the initial $8,000 amount to $6,240.
  • The same amount contributed to a Roth 401(k) is in after-tax dollars. So, to contribute $8,000, employee A would have to earn $9,760 this year. When she ultimately withdraws the $8,000, it’s at the full value since taxes were effectively paid up front.
  • The $8,000 contributed to her HSA reduces her taxable wage base, so she saves some money in 2020. When she withdraws the $8,000 it isn’t taxable, so she has access to the full amount she contributed.

With the HSA, the employee saves money both in the year they contribute and the year they withdraw while retaining access to the full amount of the initial contribution.

In all three accounts—401(k), Roth 401(k) and HSA, the employee can choose to invest contribution dollars, so their balance has the opportunity to grow over time. With the HSA and the Roth, investment earnings are not taxable; in the 401(k) they are.

Investments and contributions can grow at the half-century mark. 

The contribution, investment and distribution rules for these plans don’t vary before an employee turns 50. At the half-century mark, an employee is eligible for additional contributions in their 401(k). At 55, the HSA catch-up contribution becomes available.  

Just under 85% of employees with access to a 401(k) participate in their plan, and the average contribution rate is a little over 7%. For employees between 50 and 59, the contribution rate is slightly higher at 10.1%.

Fully funding an HSA could help employees with relatively short time horizons before retirement. 

Because many are already saving for retirement, for employees over 50 with access to an HSA it’s a matter of diverting some of their pre-tax dollars to their HSA. It may make sense for these employees to aim for funding their 401(k) up to their employer match threshold while fully funding their HSA.

Even with a relatively short time horizon before retirement, older employees have a powerful tool in their HSA if they understand its advantages and how HSAs compare to traditional retirement savings vehicles. Employers can support them in leveraging HSAs with targeted strategic communication and plan design techniques.

Learn more in our e-book below. 

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