How a health savings account can help you retire

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Myles Ma, CPFCSenior ReporterMyles Ma, CPFC, is a certified personal finance counselor and former senior reporter at Policygenius, where he covered insurance and personal finance. His expertise has been featured in The Washington Post, PBS, CNBC, CBS News, USA Today, HuffPost, Salon, Inc. Magazine, MarketWatch, and elsewhere.

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Updated July 11, 2019. An increasing number of people have health savings accounts, but not everyone makes the most of them.

Enrollment in HSAs has increased since they first became available in 2004, according to data from the Employee Benefit Research Institute. More than 20 million people were enrolled in HSA-eligible health plans in 2016.

Account holders can invest their balances in stocks, bonds, mutual funds and other long-term investments, but very few do. Those that aren't might be missing out on a helpful way to save for retirement.

Why don't people invest HSA money?

Only 4% of HSA account holders invested their balances in something other than cash in 2016, EBRI data show. One reason may be because HSAs are tied to high-deductible health plans, said Paul Fronstin, director of health research for EBRI. People with HDHPs need to set aside money for health care expenses. (Learn how to make the most of an HDHP).

"A lot of people are not in a position to both preserve the money in the HSA for the future and pay for their health expenses today," Fronstin said.

He added that account holders don't always know they can invest the money.

"I get the sense there's a lot of ignorance about how these accounts work," Fronstin said.

However, EBRI data show people are more likely to invest the longer they have an account. Among accounts opened in 2005 or earlier, 11% have investments other than cash, compared to only 1% of accounts opened in 2016.

People may also not be aware they can move money between different HSA accounts if they change health plans when starting a new job.

How HSAs can help you retire

With a traditional individual retirement account, contributions are tax-free, but withdrawals are taxable. With a Roth IRA, contributions are taxed, but withdrawals are taxable.

HSAs offer a triple tax advantage.

"It's the only type of account you can take a tax deduction for putting money into it, it grows tax deferred and as long as you use the withdrawals for qualified medical expenses, they can be pulled out on a tax-free basis," said Mike Giefer, adviser for the Johnston Group, a financial planning firm. In addition, you can withdraw the money for non-medical reasons after 65, though you'll pay income tax on withdrawals.

The tax advantages of an HSA mean account holders can turn modest contributions into large gains over enough time, Giefer said.

That doesn't mean an HSA can replace a regular retirement account. Employer-provided retirement accounts have one big advantage over HSAs: Many employers match contributions up to a certain amount.

When deciding where to put your retirement savings, make sure to maximize that match first, Fronstin said.

You should also remember that HSAs only come with high-deductible health insurance plans. People should pick a plan that best suits their health needs, not just because it comes with an HSA, Giefer said. (Policygenius can help you compare health insurance prices.)

The IRS gives 401(k) plans another advantage over HSAs. The annual contribution limit for a 401(k) is $18,500, compared to $6,900 for HSAs.

And while HSA account holders can invest their money, the offerings aren't as expansive as those in employer retirement plans, Giefer said.

That may change as HSAs become more visible and larger companies start offering them, Giefer said.

"In the last few years there seems to be a lot more awareness and a lot more focus on health savings accounts and how they can fit into an overall comprehensive financial planning investment strategy," he said.

While an HSA may not be able to stand in for a dedicated retirement account, it can still be part of a long-term savings plan.

"It's our hope that people get better education because they're very underutilized and potentially incredibly valuable investment vehicles," Giefer said.

Have an HDHP? Learn how to open an health savings account.

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