Industry Voices

Tax-Advantaged Relief and Retirement Savings: HSAs Shape the Way for the Millennial Generation

By PS | July 10, 2017
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Whether Millennials have a general distrust in modern health care, or apprehension over the cost of high premiums or deductibles, opportunities abound for employers to educate and empower these younger workers when it comes to health benefits and tax-advantaged plan offerings that yield significant cost savings potential—for the here and now, and in preparation for retirement. The time is ripe for the Millennial generation to understand the ins and outs of an HSA, particularly the underutilized savings opportunities that carry sky-high potential for storing away tax-advantaged, interest-bearing funds for the future.

Contributions to an HSA reduce taxable income, and the interest earned on HSA balances and investments is tax free. The result is triple tax savings: Contributions, interest from investments, and ongoing and future qualified distributions can all be tax exempt under normal circumstances. Because an HSA enables individuals, and families, to set pre-tax dollars aside—along with any employer contributions—the funds help to offset high deductibles. Further, the account is portable, meaning that it belongs to the employee and goes with him wherever he goes, should he change employers. And, unlike a flexible spending account (FSA), there are no “use it or lose” policies at the end of a plan year; funds roll over, year after year.

Drawing many favorable comparisons to the traditional 401(k), the HSA is now widely recognized as a true, tax-advantaged way to save for health care costs in retirement. By future-proofing funds in an HSA, young employees in their 20s could, theoretically, start making careful investments and save enough to meet their retirement needs by age 60 for both lifestyle and health-care expense coverage.

For example, if a 25-year-old employee contributes $3,000 a year to his HSA each year until retirement, uses $1,500 a year for medical expenses, earns 6% a year in interest and investments, and reinvests all earnings, the value of the HSA could be about $246,000 by the time he turns 65. This estimate does not include potential contributions from the employer—an increasingly popular option, as the money employers save by driving enrollment into lower-cost high-deductible health plans (HDHPs) can be apportioned to help jump-start employees’ HSAs early in the plan year.  

NEXT: Stacking up the savings