HSA Contributions Can Create Surprisingly Large Nest Eggs For Retiree Health Expenses

A person contributing the maximum allowable amounts for 40 years to a health savings account (HSA) without making withdrawals could accumulate up to $360,000 for health care expenses if the rate of return was 2.5 percent, $600,000 if the rate of return was 5 percent, and nearly $1.1 million if the rate of return was 7.5 percent, according to recent research from Employee Benefit Research Institute (EBRI). With an ever-increasing number of Americans gaining access to HSAs via their employment-based health plan, how much could they accumulate for health care expenses in these accounts depends on how much is contributed to the HSA, as well as how much is withdrawn, and what the investment return and fees on the HSA are.

EBRI points out that HSAs provide account owners a triple tax preference: (1) contributions to an HSA reduce taxable income; (2) earnings on the assets in the HSA build up tax-free; (3) and distributions from the HSA for qualified expenses are not subject to taxation. Because of this triple tax preference, some individuals might find using an HSA as a savings vehicle for health care expenses in retirement more advantageous from a tax perspective than saving in a 401(k) plan or other retirement savings plan.

“Depending on the rate of return in an HSA, these accounts have the potential to generate significant assets,” said Paul Fronstin, director of EBRI’s Health Research and Education program. However, he added, “many individuals may not have the means to both save in an HSA and pay their out-of-pocket health care expenses. And HSA balances may not be enough to pay all medical expenses in retirement even if maximum contributions are made for 40 years.”

For more information on the report, Lifetime Accumulations and Tax Savings from HSA Contributions, visit http://www.ebri.org.

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