Exploring Your Options: HSA Investment Account And How It Compares To Other Retirement Accounts

Exploring Your Options: HSA Investment Account And How It Compares To Other Retirement Accounts

It's no secret that investing for retirement can help ensure greater financial stability in the later years of life.  Going this route calls for selecting suitable investment account types that align with one's financial goals, circumstances, risk tolerance, and investment horizon. 

When it comes to saving and investing for retirement, you have a handful of options: 401k plans, IRAs, Roth IRAs, Deferred Comp plans, and more. Navigating the best option for you can be tricky, and having the right guide can help. We at Cooke Wealth Management (CWM) work with our clients to identify their options and help them decide which is best for them. 

In some cases, this involves a Health Savings Account (HSA). So let’s start with the basics, draw a comparison between HSA and other retirement savings accounts, and then move on to how we approach retirement planning. 

Understanding HSA Investment Accounts

Often considered a trifecta of potential tax benefits, Heath Savings Accounts (HSAs) are a highly advantageous investment vehicle targeting individuals with high-deductible health plans. The primary objective of HSA investment accounts is to enable these individuals to make tax-free contributions to meet their healthcare expenses. The funds contributed into HSAs can be used to cover medical costs that your health insurance does not..

The magic of an HSA lies in its 'triple tax advantage.' This unique proposition refers to the three-stage tax benefit that HSAs provide to account holders:

  1. Tax-Free Contributions: The funds you contribute to your HSA are deductible from your federal taxes. Some states will also allow these deductions. But in any case, your federal taxable income is reduced, potentially putting you in a lower tax bracket and saving you money at tax time.  

  2. Tax-Free Growth: The money in your HSA doesn't just sit there. It can be invested, similar to money in retirement accounts. This money can grow tax-free, and you don’t have to pay taxes on the appreciation you get. This can increase your savings over time, significantly boosting your healthcare fund.

  3. No Tax With Health Expenditures: Any withdrawals used for qualified health-related expenses are entirely tax-free. You can freely pay for deductibles, prescriptions, doctor visits, long-term care, and other medical needs. 

Unique Advantages of HSA Investment Accounts In Retirement Planning

Healthcare can  be one of the most significant expenses during retirement. Having an HSA investment account can help minimize the financial stress associated with medical expenses since it can be used to cover current and future healthcare costs. Contributions, investment growth, and qualified medical withdrawals enjoy tax-free status, a benefit not typically seen in other retirement accounts.

HSAs are also unique because they never expire, unlike a Flexible Spending Account (FSA), and they are portable. This means the account is not tied to your employer and goes with you if you change jobs or retire.

Furthermore, HSAs can be used tax-free for Medicare premiums (excluding Medigap coverage), and after age 65, the penalty for non-qualified medical distributions is removed. However, you’ll still owe tax on any non-qualified distribution after age 65. 

Non-Medical Expenses And Estate Planning

One of the less commonly known advantages of HSAs is the option to use them for non-medical expenses after age 65. Although these withdrawals are taxable as income, removing the 20% federal penalty makes an HSA remarkably similar to a 401(k) or traditional IRA. This flexibility in potential usage reinforces the power of HSAs in retirement planning.

In terms of estate planning, HSAs can play a role  as well. The account owner can designate a beneficiary to inherit the HSA. If the beneficiary is the owner’s spouse, the ownership is transferred to them after the original owner’s death.  

However, suppose the beneficiary is not the spouse. In that case, the HSA stops being an HSA, and the fair market value of the HSA becomes taxable to the beneficiary in the year the account owner dies, which requires careful planning. Thus, while an HSA provides opportunities for estate planning, understanding the tax implications is crucial to maximize these benefits.

Comparative Analysis: HSAs, 401(k)s and IRAs

Health Savings Accounts (HSAs), Individual Retirement Accounts (IRAs), and 401(k)s are all common investment accounts used for retirement planning. However, they differ significantly in terms of tax implications, distribution rules, and contribution limits .

Tax Implications

HSAs offer triple tax benefits: contributions are tax-deductible, investments grow tax-free, and withdrawals for qualified medical expenses are tax-exempt. This advantageous tax structure gives HSAs a unique position amongst retirement accounts.

In contrast, IRAs and 401(k)s are subject to tax deferral. It simply means that deposits are tax-deductible (you don’t pay tax on the money that you put in), whereas the withdrawals are taxed as ordinary income (you pay taxes on the money when you take it out). However, when using Roth IRAs and Roth 401(k)s, you pay taxes upfront and, thus, can generally withdraw these funds tax-free during retirement.

Distribution Rules

HSAs allow for tax-free withdrawals for qualified medical expenses at any age. If used for non-medical expenses before age 65, there is a 20% penalty on top of taxes owed. After 65, non-medical withdrawals are taxed, similar to a  traditional IRA or 401(k) distribution.

In the case of traditional 401(k)s and IRAs, withdrawals before 59 ½ often incur a 10% penalty on top of applicable taxes unless specific exceptions apply. After this age, withdrawals are subject to ordinary income tax.

Investment Growth Potential

In an HSA, contributions can pay for current healthcare expenses and be invested for future growth. Many HSAs offer investment options, allowing participants to choose from various mutual funds or ETFs (exchanged traded funds).

IRAs and 401(k)s also provide investment options. 

Contribution Limits And Withdrawal Rules

You’re eligible to contribute to an HSA if your health insurance is a High Deductible Health Plan. For 2023, the HSA contribution limit is $3,850 for an individual and $7,750 for a family. 

Eligibility for IRAs is based on current income, and in many cases you may find you make too much money to contribute to an IRA. If you are eligible to contribute to an IRA, the limit is $6,500 if you're under the age of 50 and $7500 if you're 50 or older. If your employer offers a 401(k) plan, the limit you may contribute sits at $22,500 if you're under 50 and $30,000 (an additional $7,500) if you're 50 or older.

Withdrawal rules for HSAs, IRAs, and 401(k)s relate to age and withdrawal purpose. Although HSAs, IRAs, and 401(k)s can penalize unqualified or early withdrawals, each account has specific exceptions. 

Investment Strategies For HSAs And Other Retirement Accounts

At Cooke Wealth Management, we adopt a conservative and meticulous approach to managing retirement accounts, seeking to balance risk with reward and optimize for tax-advantaged growth.

Our investment strategy emphasizes capital preservation and growth, using a diversified portfolio that aims to blend low-risk securities and equities. We regularly rebalance portfolios to maintain desired asset strategies , designed to facilitate steady growth and minimize potential losses in volatile markets.

When it comes to your HSA, we generally recommend investing it for future medical expenses, leveraging compounded and tax-free growth. 

The benefits of investing a portion or all of your HSA assets for long-term growth include tax-free growth of money in the HSA, no "use it or lose it" policy allowing funds to roll over annually, and flexibility in retirement. Post-65, HSA withdrawals for non-qualified medical expenses are taxed as income without additional penalties, similar to traditional retirement accounts but with the added benefit of tax-free medical expense coverage​​.

Cooke Wealth Management’s Role In Retirement Planning

We understand your retirement journey is unique, so we don't offer generic, "one size fits all" solutions. We specialize in creating customized retirement plans tailored to your specific goals​​.

Our process begins with setting your financial goals and building a custom-tailored plan. We are here to help guide you to make confident decisions about your financial future, working to ensure the  advice aligns with your values and objectives​​.

Adhering to our guiding principles of placing the client first, maintaining integrity, and incorporating a Biblical perspective, we strive to make complex financial systems understandable and manageable for you. Our commitment is to help you build and maintain a financial plan designed to achieve  your goals and simplify your life. . 

So, if you like what you’re hearing and are in  need of wise financial advice when it comes to planning for retirement, schedule a discovery session today!

HSA Retirement Account FAQ

Q: What qualifies me for an HSA?

  • Eligibility for an HSA investment account requires coverage under a high-deductible health plan (HDHP), not being enrolled in Medicare, not being claimed as a dependent on someone else’s tax return, and having no other health coverage outside of what is permitted by the IRS​​. Your health insurance provider can often tell you if your plan qualifies as a HDHP plan. 

Q: How do the tax benefits of an HSA investment account compare to other retirement accounts?

  • As previously stated, these accounts offer significant tax advantages. Contributions made are pre-tax, reducing taxable income. Withdrawals used for qualified medical expenses are always tax-free. After age 65, funds can be used for any purpose without penalty, although non-medical withdrawals are taxable, similar to traditional retirement accounts​​​​.

Q: What are the contribution limits for HSA investment accounts?

  • In 2023, you can contribute up to $3,850 for individual HDHP coverage and $7,750 for family HDHP coverage to an HSA account​​.

Q: Can HSA investment accounts be used with other retirement accounts?

  • Yes, an HSA investment account is an excellent supplement to other retirement accounts like IRAs and 401(k)s. It offers unique tax benefits for medical expenses and post-65 flexibility, enhancing the overall retirement savings strategy​​.

Q: What should I consider before opening an HSA investment account?

  • Before opening an HSA account, evaluate if your current health plan qualifies or if a high-deductible health plan fits your healthcare needs. Next consider the provider, associated fees, and available investment options. It's important to understand that while HSAs offer great flexibility and tax advantages, they may not suit everyone's medical or financial situation​​.