Your Retirement Questions Answered: The Benefits of Health Savings Accounts

Welcome back to retiring today. I'm Molly Nelson here with Sean Honkoff and Lauren Merkle. Now it's time to answer your questions from our online Journey to Retirement workshop. We call this section Your Journey, Your Questions. Here's a question we got recently. What are the tax benefits of a health savings account? We'll get to the tax benefits. We'll talk to Sean in just a minute, but first, Lauren, why don't you give us a little health savings account 101. What is a health savings account and who has access to one? Health savings account, most people call it an HSA for short, so that's what we're going to call it. But simply, it's just a savings account that if you qualify, you can contribute to it on an annual basis, and then you can take money out of this account to pay for qualifying medical expenses. Now, a lot of people, there is some confusion on whether or not you can participate in an HSA or not, because you do have to have a qualified high deductible health care plan in order to have the HSA. That plan, most of the time, will be sponsored by your employer, so you can talk to your employer, see if they have a high deductible health care plan that does qualify, and if they do, they might also offer you an HSA that they can just auto deduct from your paycheck. That makes it easy, but a lot of employers don't have an HSA set up like that, so in that case, you would go to a different institution, set the HSA up, but the prominent factor that determines whether or not you're eligible is if that employer, if your employer offers that qualifying high deductible health care plan. Okay, and if you have access to an HSA or you qualify, it can be very beneficial. Yeah, if you can get to an HSA, you're going to love it, and the biggest reason is you get all of the tax advantages. It's the only account out there that is considered to be triple tax advantaged, and what we mean by that is, one, when you make those contributions into there, you get a deduction, you don't pay taxes on those dollars. Two, as the money is in the HSA, it grows tax deferred, and then three, as you take distributions from an HSA, as long as you're using it for those qualifying medical expenses, you don't pay taxes on those distributions, so there's no other account out there that's going to give you all of that. That's the biggest reason why we're talking about HSAs. That's why we want to know. We want to make sure that you're aware of if you have one and then help you best incorporate that into your overall retirement plan. And for some, it can be very powerful later into retirement. For a lot of people, it's really tempting to make contributions to the HSA and then take it out in the same year to use for the qualifying medical expenses, and if you have to do that, from a cash flow standpoint, perfect. You're still getting some of those tax benefits, but if you don't have to, you can consider allowing that money underneath the HSA to take advantage of the tax-free compounding and then cash flow the medical expenses because you're working and you have good cash flow coming in. So if you can afford to do that, take advantage of the triple tax benefits that the HSA provides, cash flow your medical expenses because in retirement, most likely you're going to have an abundant opportunity to use the HSA after you allowed it to grow and take advantage of the compounding on the qualified medical expenses in retirement. Abundant opportunity is a way of saying you're likely going to have medical expenses in retirement and then you'll have that money there that's been growing and you'll have even more money to use because it's maybe even been invested and experienced some growth, right? Yeah, when you contribute to the HSA, you do get the tax deduction out front, but if you're taking that money out right away within that year or the next year, you're not really maximizing the tax-free compounding that the HSA can provide. Now, if you have to, great, do it. You get some of the tax benefits, but if you can, allow that money to grow for a period of time, cash flow your expenses from the W-2 or other sources, and then take advantage of the triple tax benefits of that superhero that we call the HSA. And this was one of the good questions that we got during our online journey to retirement workshop. We get a lot of good questions during the workshop and they're not just about taxes, Sean, they're about all the other things that you guys talk about in the online journey to retirement workshop. There's a whole lot more to be thinking about as you approach retirement and then get through and enjoy your retirement journey. There's six pillars that we focus on. A big one is taxes. That's why we're doing an entire episode today about taxes, but there's the lifestyle. What's this new stage of life going to look like for you? Where do you want to live? Where do you want to travel? Where are you going to spend all that free time? We're going to help you make income planning decisions. We're going to help make investment planning decisions. There's the healthcare and then there's legacy planning. So we've got to think about all of that. And the big takeaway from the workshop is that you find out that there's so much overlap. As we're making decisions in one pillar, we've got to be thinking about the trade-off or the impact that it might have on another part of the retirement plan. And I'd say another big takeaway from the workshop is that you find out how you can save money areas where you have a little more control in retirement and areas where you can put more money into your pocket. What a lot of people like about the workshop is we use a hypothetical couple, John and Sue, and we show you through the strategies that they implement how John and Sue can save over $100,000 off of their retirement tax bill, how they can increase their Social Security lifetime income by over $80,000 and much, much more as we go through those six pillars. So real actionable strategies that people can use that can make a big, big benefit to the overall outcome of the retirement plan.