NCPA - National Center for Policy Analysis

Using HSAs as IRAs

June 10, 2014

According to the Wall Street Journal, some Americans are using their Health Savings Accounts (HSAs) as supplementary retirement accounts.

If a taxpayer has a high-deductible insurance plan (for family coverage, this means a deductible from $2,500 to $12,700), he can fund an HSA, which allows him to store pretax income in an account that can be used to cover medical expenses. Withdrawing the funds for nonmedical expenses, however, will incur a penalty of 20 percent -- that is, until age 65. After age 65, any money withdrawn for nonmedical purposes is taxable, but it is not penalized.

If those HSA funds are left to grow in an investment account over the years, the HSA holder can see a significant financial benefit. HSAs must be held by trustees, and financial advisers often recommend that the funds be placed into mutual funds.  

However, there are contribution limits on these plans. For 2014, a person with an individual plan may not contribute more than $3,300 to his HSA, though these limits increase after age 55. Because of the contribution limits, the funds are unlikely to play a major part in retirement savings.

Does it make better sense to for consumers to save their HSA funds for retirement or withdraw them for medical expenses as they occur? Financial planner Helen Huntley says that the answer depends upon a person's anticipated financial position: "If you save it all for retirement, you are paying your current expenses with after-tax dollars and your future expenses with pretax dollars. If you spend it now on medical expenses, you are doing the reverse.'' If a person expects to be in a higher tax bracket today than after retirement, Huntley suggests that he use his HSA funds to pay medical expenses now.

Source: Peter S. Green, "Health Savings Accounts Can Double as Shadow IRAs," Wall Street Journal, June 2, 2014.


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