The flexibility of HSAs, unpredictability of health and retirement costs, and the need for education combine to create a unique opportunity to invest in HSAs.[1] HSAs have become an important part of the healthcare and retirement picture for millions of Americans as employees and employers continue to realize their cost saving benefits.[2] Fidelity projects that a 65-year old couple retiring in 2017 would need approximately $275,000 in today’s dollars to cover healthcare costs through retirement, up 6% from their 2016 estimate.[3] 30 years of inflation would see that figure rise to well over $450,000.[4] How can an investor best prepare themselves for these high costs?

Assuming an employee is good at maintaining records and receipts, HSAs are timeless. Medical expenses paid out-of-pocket years ago can be used to take tax-free qualified distributions today, but only if the employee saved the receipt and the expense occurred after establishing the HSA.[5] For instance, if an employee takes the $100 from his pocket to pay for a medical expense today, saves his receipts, and let his HSA balance grow, later he’ll be able to withdraw the $100 from the HSA at any time, tax-free.[6] However, the investment gains from the $100 will continue to accrue within the HSA.[7] The employee will be able to use those investment gains towards qualified medical expenses, or he will be able to withdraw them after 65 at ordinary income tax rates.[8] Withdrawals for non-qualified expenses prior to 65 incur a 20% penalty in addition to ordinary income tax.[9]

Long-term planners and investors should also shop for HSA providers that specialize in investing and utilize mutual funds that vary in quality, performance, and diversity. There are even HSA providers that offer the ability to mirror investments in your 401k with HSA investments. Choosing an HSA with quality investment choices is essential to investor success. Investors can also consider HSA providers that offer self-directed brokerage accounts.[10] A brokerage window can add value to HSAs by expanding the list of investable securities beyond mutual funds to include securities such as stocks, bonds and ETFs.[11] Experienced investors may utilize the larger investable landscape, however, self-directed brokerage may not be recommended for less knowledgeable investors.

HSAs also come with the ability to combine their timelessness and transferability when designating a beneficiary. If the account holder passes away before their spouse and have designated the spouse as the beneficiary, the account remains an HSA and the partner will become the owner.[1] The widow can use the money to pay for qualified healthcare expenses, even if they are not enrolled in a HDHP.[2] When the beneficiary is not a spouse, the HSA terminates on the date of the individual’s death.[3] Their heir receives a distribution, and the fair-market value becomes taxable income to the beneficiary—though the taxable amount can be reduced by any medical expenses incurred by the decreased within a year of the death.[4]

One can truly appreciate the longevity and capability of HSA investing when looking at examples: if a single person contributes the annual maximum and invests her balance for the long term,[5] she could accumulate up to $360,000 after contributing for 40 years to an account with 2.5% rate of return. This amount jumps to approximately $1.1 million with a 7.5% return and no withdrawals.[6] These amounts are even more impressive when combined with 40 years of tax savings. Over 40 years, an individual earning 2.5% on her HSA would save $143,000 if in the 39.6% tax bracket.[7] By comparison, an individual earning 7.5% on her HSA would save about $420,000 if in the 39.6% bracket.[8] Not only can HSAs fuel a healthy retirement, but they can provide for a substantially higher income over an employee’s working life.

Find out how HSAs fuel retirement throughout this series. Part Four analogizes HSAs to a similar strategy.

Want to discuss further? Contact our Investments team at (800) 475-0991

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Securities and advisory services offered through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker/dealer and a Registered Investment Advisor. Cetera is under separate ownership from any other named entity.

For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. The return and principal value of bonds fluctuate with changes in market conditions. If bonds are not held to maturity, they may be worth more or less than their original value. Exchange-traded funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus contains this and other information about the investment company, can be obtained from your financial professional at 800.475.0991. Be sure to read the prospectus carefully before deciding whether to invest.

These results are for illustrative purposes only and should not be deemed a representation of future results. Circumstances, solutions, and/or results are based on specific facts tied to unique client situations. Favorable results cannot be guaranteed even in a similar scenario. Each specific set of circumstances will differ depending on client needs and profile. Actual results may be more or may be less than those shown. Past performance does not guarantee future results. This assessment is that of the writer, and not the recommendations or responsibility of Cetera Advisor Networks LLC or its representatives. The solutions presented in this scenario are being offered through Summit.

[1] https://www.irs.gov/publications/p969

[2] Id.

[3] Id.

[4] Id.

[5] By long term, we mean investments such as stocks, bonds, and funds that contain those securities, as opposed to cash and equivalents.

[6] https://www.ebri.org/pdf/notespdf/EBRI_Notes_07_July-14_HSAs-IRAs.pdf

[7] https://www.ebri.org/pdf/notespdf/EBRI_Notes_07_July-14_HSAs-IRAs.pdf

[8] Id.

[1] http://www.devenir.com/docs/Devenir_White_Paper_HSA_vs_401(k)_Investing.pdf

[2] https://pressroom.vanguard.com/nonindexed/Research-Planning-for-healthcare-costs-in-retirement_061918.pdf

[3] https://www.businesswire.com/news/home/20170824005075/en/Health-Care-Costs-Retirees-Rise-Estimated-275000/

[4] Id.

[5] Internal Revenue Bulletin 2004-33 Notice 2004-50, Health Savings Accounts—Additional Qs&As, Answer 39, August 16, 2004

[6] https://www.bu.edu/hr/documents/BN_Fidelity_HSA_Guide.pdf

[7] Id.

[8] https://www.betterment.com/resources/truth-about-hsas-and-retirement/

[9] Id.

[10] http://devenir.com/docs/Devenir_Viewpoint_Best_Practices_Executive_Summary.pdf

[11] Id.

[1] https://www.irs.gov/publications/p969

[1] Id.

[1] Id.

[1] Id.

[1] By long term, we mean investments such as stocks, bonds, and funds that contain those securities, as opposed to cash and equivalents.

[1] https://www.ebri.org/pdf/notespdf/EBRI_Notes_07_July-14_HSAs-IRAs.pdf

[1] https://www.ebri.org/pdf/notespdf/EBRI_Notes_07_July-14_HSAs-IRAs.pdf

[1] Id.