Are HSAs the New IRAs?

FEBRUARY 16, 2018

Like Flexible Spending Accounts (FSAs), HSAs allow you to set aside funds to pay out-of-pocket medical expenses. Unlike FSAs, HSAs can help those in high-deductible health plans1 sock away triple-tax-free money for retirement. Here’s how:

  • Contributions to HSAs are tax-deductible.2
  • Capital gains, dividends and interest accumulate tax-free.3
  • You pay no tax on withdrawals for approved medical expenses.
  • And whereas an FSA is attached to your employer and you forfeit any unspent money at the end of the year, an HSA is yours even if you change jobs and you can keep the money all the way into retirement (though you can no longer contribute once you’ve enrolled in Medicare).

“It’s really a unique opportunity to use a highly tax-advantaged strategy for retirement,” says Robert G. Aruldoss, a senior financial planning analyst at the Schwab Center for Financial Research.

A recent report from HealthView Services estimates that the average lifetime out-of-pocket health care costs for a 65-year-old healthy couple that retired in 2015 will be $394,954.4 Fortunately, HSA-qualified expenses include co-insurance, deductibles, dental and vision care, prescriptions and many other items not covered by Medicare.

And here’s the clincher: If you use HSA funds on nonmedical expenses before age 65, you pay not only ordinary income tax but also a 20% penalty; however, if you use HSA funds for nonmedical expenses after age 65, you pay only ordinary income tax. In other words, you’d take no worse a tax hit than you would with an Individual Retirement Account.

The bottom line: HSAs can help boost your retirement savings for health-related expenses triple-tax-free.

1Defined as those with a minimum annual deductible of $1,300 for individuals and $2,600 for families. Enrollees can’t be enrolled in Medicare, claimed as a dependent on someone else’s tax return or covered by another health plan without a high deductible.

2While HSA contributions are exempt from federal income tax, they are not exempt from state taxes in Alabama, California, New Jersey and Wisconsin.

3State taxes may vary.

42015 Retirement Health Care Costs Data Report.

Important Disclosures

This information is not intended to be a substitute for specific individualized tax, legal or investment-planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner or investment manager.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve. Data contained herein from third-party providers are obtained from what are considered reliable sources. However, their accuracy, completeness or reliability cannot be guaranteed.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.