HSAs Offer a Good Boost to Retirement Savings

Research from the Employee Benefit Research Institute (EBRI) shows an individual who saves in an HSA for 10 years could accumulate between $53,000 and $68,000, depending on the rate of return realized and on the contribution rates assumed, while those saving for 20 years could wind up with between $118,000 and $193,000. After saving for 40 years, an individual could have $360,000 if the realized rate of return were 2.5%, $600,000 if it were 5%, and nearly $1.1 million if it were 7.5%.

EBRI made a number of assumptions in its research, including that the maximum contribution was made each year; individuals eligible to make catch-up contributions (those ages 55 and older) made those contributions; and there were no distributions made from the HSA to pay for any health care claims or services received while covered by the HSA-eligible plan, among other things.

In order to maximize the savings in an HSA to cover health care expenses in retirement, HSA owners would need to pay the medical expenses they incur prior to retirement on an after-tax basis using money not contributed to their HSA. EBRI concedes that many individuals may not have the means to both save in an HSA and pay their out-of-pocket health care expenses. Also, HSA balances may not be sufficient to pay all medical expenses in retirement even if maximum contributions were made. In prior work, EBRI has found a married couple, both age 55 in 2008, would need a combined $325,000 to $654,000 by the time they reach age 65 in 2018 to have enough money to cover their premiums and out-of-pocket expenses 50% of the time, and would need $511,000 to $1 million to have a 90% chance of having enough savings.

EBRI pointed out HSAs provide account owners a triple tax advantage: Contributions reduce taxable income; earnings on the account build up tax free; and distributions for qualified expenses from the account are not subject to taxation. Its research shows an individual earning 2.5% on his or her HSA would save about $36,000 in federal income tax over 40 years if he or she were in the 10% tax bracket, while an individual in the 39.6% tax bracket would save about $143,000. By comparison, an individual earning 7.5% on his or her HSA would save about $106,000 in federal income tax over 40 years if in the 10% tax bracket, and about $420,000 if in the 39.6% bracket.

HSAs also provide potential savings from payroll tax (Social Security and Medicare paid under the Federal Insurance Contributions Act (FICA)), and any direct employer contributions to an HSA are also excluded from the employer’s payroll tax base.

The full report, “Lifetime Accumulations and Tax Savings from HSA Contributions,” is published in the July EBRI Notes, online at www.ebri.org.