Historically, those approaching or entering retirement have significantly underestimated their cost of living, particularly when it comes to healthcare. This trend is beginning to change, however, with younger generations getting ahead of future expenses by exploring a wider range of retirement avenues, including health savings accounts (HSAs).
According to the 2022 Devenir & HSA Council Demographic Survey, one in five Americans in their 30s had an HSA at the end of 2022. Additionally, younger consumers are not just saving to their HSA, they’re also taking advantage of the investing options. The Employee Benefit Research Institute’s (EBRI) Analysis shows how younger generations are becoming power users of HSAs, with Millennials and Gen Z representing 60% of all investment accounts.
As younger generations continue to embrace HSAs, including Millennials, who make up more than one-third of the current workforce at 39.4%, it’s critical they understand how to maximize HSAs for both short- and long-term goals.
Retirement plan advisors can help participants who have HSAs maximize them by sharing the following information.
How HSAs Work
There are many advantages to having an HSA. Participants should begin by familiarizing themselves with the various account options so they can maximize their usage.
Here are some quick facts:
- An HSA is an individually owned, tax-advantaged account.
- The money you put in can be used for qualified medical expenses at any time, including during retirement.
- The 2024 maximum contribution amount for individuals is $4,150 and $8,300 for family coverage.
- HSAs have a triple tax advantage: tax-free deposits, earnings, and withdrawals.
To open and contribute to an HSA, you must:
- Be enrolled in a high-deductible health plan (HDHP)
- Not be enrolled in any part of Medicare
- Not be claimed as a dependent on another’s taxes
- Not have any other non-permissible health coverage, such as a medical plan other than an HDHP or a flexible spending account (FSA)
During annual enrollment, many employers will offer HSAs, but if an employees’ company does not, they can still open one with an HSA provider. Your HSA is tied to you, so your account will stick with you throughout every life stage, with unused funds rolling over each year.
Using an HSA for Saving and Investing
When it comes to getting the most out of an HSA, the account holder’s young age paired with the ability to start saving early are great assets.
As mentioned earlier, being intentional about investing within an HSA is a great way to potentially maximize HSA dollars. Just like other retirement accounts, strategic allocation can significantly affect savings—particularly if the account holder intends to earmark some or all these dollars for the long-term.
An HSA should be viewed as one piece of a person’s overall financial portfolio. People should regularly review all the accounts they are actively contributing to, such as their 401(k) and emergency fund, as well as any debt they are currently paying toward student loans or other financial obligations, to ensure balance and diversity.
Spending Your HSA Correctly
In addition to maximizing contributions, HSA account holders need to be sure they understand what is considered a qualified medical expense that their HSA dollars can cover. Anyone using their HSA for a non-qualified expense will have to pay ordinary income tax on the withdrawal and will be hit with a penalty fee of 20% of what they took out.
Some examples of qualified medical expenses include:
- Your deductible
- Dental treatments, exams or cleaning costs
- Prescription drug costs
- Vision expenses such as contact lenses or glasses
- Chiropractic or acupuncture fees
- Hand sanitizer
- Eye surgery
You can find a full list of HSA eligible expenses in the IRS Publication 502.
HSA Use Changes as Life Does
As an HSA account holder moves through life and their financial goals change, so will the way they’ll utilize their HSA. When they’re in the early stages of being an account holder, they’re likely also just starting out on the salary spectrum, so they may be contributing less. They may also be spending more, particularly if they have a family.
As they move further into their career, they may be earning more and can therefore save more in their HSA. Toward the end of their career, they will hopefully be able to take full advantage of the saving and investing opportunities that an HSA provides. Finally, once they reach retirement, they can keep as much of their HSA invested as possible while utilizing it to cover qualified medical expenses.
An HSA is a lifetime account, and if they start maximizing its benefits at a younger age, it has even more time to grow with them and help meet their ever-changing needs.
SEE ALSO:
• Higher Numbers of HSAs Positioned as Retirement Savings Strategy
• HSAs See High Growth, Yet Key Issues Remain
• Fidelity HSA Assets Hit Record-High $24 Billion
Brian Hutchin, CTP, is executive vice president and director of UMB Healthcare Services at UMB Bank in Kansas City, Mo. With more than 25 years of financial industry experience, he is responsible for the overall strategy and management of the Healthcare team, including sales, implementation and relationship management. Additionally, he serves as an executive team member for the Institutional Banking division, providing input on the strategic direction of the department and overall growth of the business.
