Health savings accounts: A physician's guide to supplementing their retirement

Though many physicians have access to Health savings accounts (HSAs) through their workplaces, few people take the best advantage of these accounts. Even if they choose to activate their HSAs, many workers only put a small amount of money into them or chose to contribute nothing at all. In doing so, they are missing out on a savings opportunity, both for the present and the future. Many people do not understand that an HSA can be a good way to build wealth that will benefit them in retirement. A large part of this stems from not having a full understanding of what an HSA account is and how it functions.

What is an HSA?

An HSA is designed to be an accompaniment to a high-deductible health plan to help people pay for out-of-pocket expenses before the plan deductible has been met. The accounts are tax-advantaged, and they are better positioned to be used to pay for medical expenses post-retirement than any other retirement account. HSAs are easy to fund, as workplaces facilitate payroll deductions into employee accounts. However, an account owner can contribute from their own funds, and in that case, those contributions are tax-deductible and treated as pre-tax monies. This can reduce both state and federal liability on income tax. The HSA account itself grows tax-free, and interest, dividends, and capital gains are also nontaxable.

How are these accounts better suited to future medical expenses than well-known retirement vehicles such as IRAs or 401ks?

If an individual wanted to make a withdrawal from an IRA for any reason, those funds have an income tax liability. Further, IRAs and 401ks have age requirements after which there are mandatory withdrawal amounts. In the case of an HSA, when an account owner makes a withdrawal for a qualified medical expense that distribution is tax-free. There are no age requirements for withdrawals, so an account remains whole until the account owner chooses to withdraw funds. While an individual may no longer contribute after enrolling in Medicare, the account does not affect enrollment in any way. HSAs have flexibility as well. As the individual rather than the employer owns the HSA account, a move to a new job means the full account goes with the account owner. The balance also carries over year to year, unlike an FSA (Flexible Spending Account), the balance of which must be used within a calendar year or else the account owner will lose access to whatever is left at the start of the next year.

How much can you contribute to an HSA account?

Contribution limits for HSAs are adjusted according to inflation rates annually. In 2021, the limits were $3,550 for self-only coverage plans and $7,200 for family coverage plans, which includes employer contributions, and these entire amounts are tax-deductible. For those 55 and older, there is an allowance of an additional $1,000 for catch up. This year, the deductible for a high-deductible health plan was at least $1,400 for self-only coverage and $2,800 for family coverage. The out-of-pocket expenses could be as high as $7,000 and $14,000 respectively. These expenses are one reason this type of plan is more attractive to families in a higher tax-bracket who will benefit from the tax breaks without putting their health at risk. These contributions are not dependent on income level, and those who are self-employed can also contribute.

What’s the best strategy to make the most out of your HSA?

The first step is to maximize your contributions, then to make sure that unspent contributions are invested in a way that treats them as carefully as you treat other retirement investments. The same considerations exist when deciding the investment strategy to utilize, as the HSA should be treated as part of your full portfolio. If feasible, you do not have to tap into your HSA for medical expenses pre-retirement; you can use post-tax dollars to pay for those and let your HSA balance grow so that you will have a large amount when you do retire. At age 65, you can use the funds for non-medical expenses as well which can work as a supplement as a retirement income.

Including an HSA as part of a retirement strategy can create a good source of tax savings and ultimately put you in a good position for your post-retirement medical expenses. To make sure your portfolio, including your HSA, is properly aligned with your goals and risk profile, speak with an experienced financial advisor who will take a holistic look at your accounts, from your HSA to your 401k, and help you build a plan toward a secure and comfortable future.

Syed Nishat, BFA, is a partner at Wall Street Alliance Group. He holds a bachelor’s degree in business administration from University of Nevada Reno. Syed holds the FINRA Series 7, FINRA Series 63 and FINRA Series 66 licenses, along with licenses for life, disability and long-term care insurance. He also has been awarded the Behavioral Financial Advisor (BFA) designation.

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