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Enjoy Triple-Tax Savings With A Retirement and Healthcare Savings Account


One component of retirement planning that many people neglect is tax planning. Taxes can take a serious bite out of your retirement nest egg, so it’s generally advisable to save in as tax-advantaged manner as possible.

A tool that may help you accomplish this is a Health Savings Account, or HSA. These tax-advantaged accounts are used to save money for current and future medical expenses. Money that isn’t used now rolls over to future years, potentially building a large nest egg to help pay for medical costs during retirement.

Tax-Favored Retirement Savings

In a recent article in The Wall Street Journal, a retirement planning expert called HSAs “the most tax-favored savings vehicle in the U.S. tax code.” This is because HSAs offer a rare triple-tax benefit: a current tax deduction, long-term tax-free growth and tax-free withdrawals if funds are used to pay for qualified medical expenses.

In comparison, income tax must be paid on withdrawals from traditional 401(k)s and IRAs during retirement at ordinary income tax rates. With the top individual income tax rate currently as high as 39.6%, this could reduce the value of your traditional 401(k) or IRA by nearly 40 cents on the dollar.

The potential long-term benefits of the tax treatment of HSAs are significant. According to The Wall Street Journal article, each dollar put into an HSA today will be worth $2.19 in 20 years, assuming an annual inflation-adjusted return of 4%. The same dollar invested in a 401(k) will be worth only $1.64 in 20 years (assuming the same return) due to income taxes that must be paid upon withdrawal (assuming a 25% federal income tax rate).

The Nuts and Bolts of HSAs

Of course, HSA funds can only be used to pay for qualified medical expenses, which include vision and dental expenses. If you use HSA funds for anything other than healthcare costs, you’ll owe income tax on the money withdrawn plus a 20% penalty if you’re under age 65.

But healthcare costs could comprise a major chunk of your living expenses during retirement. According to the Employee Benefits Research Institute (EBRI), the average 65-year-old couple will need about $270,000 in order to have a 90 percent chance of paying for their retirement healthcare expenses.

To open an HSA, you must be covered by a health insurance plan with a deductible of at least $1,300 for an individual or $2,600 for a family in 2017. (In 2018, these thresholds will rise to $1,350 and $2,700.) In 2017, you can contribute up to $3,400 (as an individual) or $6,750 (as a family) to an HSA — these limits go up to $3,450 and $6,900, respectively, in 2018. If you’re 55 years of age or over, the limits rise by $1,000.

Meanwhile, you can contribute up to $18,000 to a 401(k) in 2017 and $18,500 in 2018 — if you’re 55 years of age or over, these limits rise to $24,000 and $24,500, respectively. These amounts are in addition to HSA contributions. Using a 401(k) and an HSA together, therefore, you could save up to $21,400 for retirement this year if you’re under 55 years old, or $27,450 if you’re 55 years of age or over.

Supplemental Tax-Free Retirement Income

There’s even a way to potentially tap into your HSA in retirement for non-medical expenses. If you have receipts for out-of-pocket healthcare costs you’ve paid since establishing an HSA, you can file to be reimbursed for these costs in retirement. This could provide a supplemental source of tax-free retirement income you can spend on anything you wish, including an RV, boat or new car.

Please contact us if you have more questions about the tax benefits of using a Health Savings Account to save money for retirement.


The commentary is limited to the dissemination of general information pertaining to Frontier Wealth Management, LLC’s (“Frontier”) investment advisory services. This information should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any security, market sector or investment strategy. There is no guarantee that the information supplied is accurate or complete. Frontier is not responsible for any errors or omissions, and provides no warranties with regards to the results obtained from the use of the information. Nothing in this document is intended to provide any legal, accounting or tax advice and Frontier does not provide such advice. This information is subject to change without notice and should not be construed as a recommendation or investment advice. You should consult an attorney, accountant or tax professional regarding your specific legal or tax situation.