As we have learned, HSAs can be used as retirement vehicles because they’re portable, enduring, and triple-tax advantaged. Another investment vehicle – 401(k)s – can serve as a nice comparison to see how HSAs might develop in the coming years. As Devenir states, “their persistent adoption could represent the second leg of the shift to consumer directed benefits, which saw 401(k) assets balloon to where they are today.” HSAs must evolve to gain wider acceptance like that enjoyed by 401(k)s and other defined contribution plans.
In contrast to 401(k) plans, HSAs providers are not subject to ERISA fiduciary standards, and the market has only recently started to get a degree of due diligence scrutiny on account fees and investment plan lineups. Nevertheless, the rapid adoption of HSA plans seems to be on a similar path to 401(k)s, in terms of the number of accounts if not yet assets. HSA accounts have grown dramatically since their inception in 2004 to just over 23 million as of 2018. For perspective, 401(k)s had roughly 19 million accounts in their 14th year. Additionally, annual HSA contribution limits are far lower than 401(k)s ($3,400 for HSAs and $18,000 for 401(k)s in 2017). These and other factors justify modest HSA balances compared to 401(k)s.
Although there are more assets in 401(k)s, they are slightly more limited as a retirement savings vehicle – while contributions are tax-deductible, distributions are required when you reach the age of 70 ½ and may be taxed as income. HSA funds are neither taxed nor penalized, as long as distributions are used for qualified medical expenses. After age 65, they can also be used for non-medical expenses without penalty though taxed as ordinary income. Withdrawals for non-qualified expenses prior to 65 incur a 20% penalty in addition to ordinary income tax.
Another useful way to compare the effectiveness of investing in an HSA and a 401(k) is to compare the tax implications on both accounts. The after-tax future value framework provided by Dr. Greg Geisler in his HSA analysis is a useful tool that can be used to evaluate long-term savings objectives. Dr. Geisler states that for certain individuals, HSAs can fuel retirement better than other vehicles and for those individuals, he suggests:
first, contribute the maximum to an HSA and contribute enough to a 401(k) to get the maximum employer match; if money is still available, next, pay down high-interest-rate debts; if money is still available, next, contribute to a 529 account if it produces state income tax savings and if funding future higher education costs of a loved one is important; and, if money is still available, contribute the maximum allowed for the year to unmatched retirement accounts.
Still, while they have been around for about fourteen years, many Americans still hadn’t heard of HSAs until their recent prominence with new healthcare legislation. As a result, the HSA marketplace has not yet enjoyed the economics of scale compared to the more established 401(k) and 529 plans. Nevertheless, HSAs will come to play a more important role in the larger picture of retirement needs. By combining savings from an HSA and traditional retirement vehicles, Americans will be better prepared for healthcare expenses incurred during their retirement years.
David Goldsmith is an Oklahoma attorney, an Investment Advisor Representative, and the Designated Supervisor for Summit.
David Goldsmith, Esq.
Financial Advisor- Retirement Plans
David Goldsmith is not affiliated with Cetera Advisor Networks LLC
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.