Market Commentary: Summer 2017 - HSA as a Retirement Tool

Jul 11, 2017 Willow Creek Wealth Management Posted in Featured, Market Commentary


Many people don’t realize that a health savings account, or HSA, can be a powerful retirement savings vehicle. The reason is, from a tax perspective, the HSA is unique in that it offers a triple tax benefit:

1. The money you contribute reduces your taxable income 2. Money within an HSA grows tax-deferred. 3. Withdrawals are tax-free if used for qualified health expenses.

Despite this generous tax treatment, there is no time limit on when funds must be used. An HSA doesn’t have a “use it or lose it” provision like the Flexible Spending Account or mandatory distributions at age 70.5 like an IRA. HSA funds can remain in the account for an extended period of time growing on a tax-deferred basis. This means that funds contributed now can grow tax-deferred for years or even decades, and then be distributed totally tax-free for future medical expenses in later life when you need it the most. We urge those who have an adequate emergency reserve to invest money into a Health Savings Account for long-term tax advantaged growth rather than as a tool for paying current medical expenses. According to the Employee Benefit Research Institute, a person contributing to an HSA for 30 years could save up to $313,000 with a rate of return of 5 percent. If the rate of return was 7.5 percent, the savings would be $469,000 ­— if there were no withdrawals along the way. So only spending HSA funds as a last resort becomes a savvy way to save on taxes and invest for the future at the same time.

HSA: You CAN Take it With You

A Health Savings Account has the additional advantage of portability. It stays with you when you change jobs or leave the market place. An HSA can even extend into death for the use of a surviving spouse — similar to retirement accounts. One potential drawback, however, is that the HSA will be closed and the monies taxable in the year you die for beneficiaries other than your spouse. So if you are eligible for a high deductible health care plan, and if it makes sense for you, consider taking advantage of the unique tax treatment the HSA offers. Contributions to both a traditional retirement plan, such as a 401(k) or individual retirement account (IRA), reduce current taxable income but distributions are taxed along with subsequent investment returns. A Roth 401(k) or Roth IRA have the benefit of tax-free growth and withdrawals, but contributions have no tax advantage. As a result, some individuals might find using an HSA as a savings vehicle even more advantageous than saving in a 401(k) plan (after the employer match is maximized) or other retirement savings plans.


As college tuition continues to soar, saving early for education is one of the best decisions parents and grandparents can make. If your children or grandchildren plan to attend college, a 529 savings plan is a great way to save. The earlier you begin, the longer you can save, and the more your money can benefit from tax-advantaged growth potential.

What is a 529 Plan?

A 529 plan is an education savings plan operated by a state or educational institution designed to help families save for future college costs. There are two types:

1. Prepaid plans that allow families to buy “units” of tuition at a rate close to today’s prices. They are cashed in when the student attends school. 2. 529 college savings plans (most popular) that allow families to invest in preselected investment portfolios that grow (or shrink) in accordance with the markets.

Both types of plans have annual fees and operating costs associated with them. These expenses can range from nearly zero to almost 2 percent of invested assets, depending on the fund and types of investments offered. Because fees can have a significant impact on the growth of assets over time, it is important to research different plans, investment choices offered, and associated fees before selecting the plan that is right for you.

Tax benefits

The 529 plan provides significant tax benefits. Besides accumulating sufficient funds to educate the next generation, these plans offer tax-free investment growth and withdrawals. Although there is no federal income tax benefit for contributing to a 529 plan, the money you invest grows tax-free as long as it is withdrawn and used for qualified, college-related expenses. So, you are getting more bang from your buck than if you invested in a taxable brokerage account. Savings in one of these plans over a period of years can be a lot less painful than writing those big tuition checks all at once. And, the tax savings can be significant.

Who can open a 529 plan?

U.S. residents, 18 years of age or older may invest in most state plans. In our practice, we often see grandparents or other relatives who wish to contribute to or set up a child’s college savings plan. The owner of the account, known as the participant, controls the account, including investment decisions and the distribution of assets.

How and where can 529 funds be spent?

Withdrawals from a 529 account can be taken at any time for any reason. However, if funds are not used for qualified higher education expenses, earnings are subject to federal income taxes at the recipient’s rate. A 10% federal penalty tax and possibly state or local tax are also added. Distributions for qualified higher education expenses are federal income tax free. For college savings plans, eligible institutions include most accredited colleges and graduate schools, including professional and trade schools. Foreign schools with attending students who qualify for federal financial aid also qualify. Contributions apply to a variety of qualified educational expenses including tuition, books, and room and board for those attending at least half time.

Gift and estate planning benefits

Grandparents can take advantage of possible gift and estate tax benefits. Contributions up to $70,000 per person ($140,000 per married couple) per beneficiary can be made in a single year, once every five years, without the money being subject to the federal gift tax under most circumstances. In some cases, these plans can play an important role in reducing future estate taxes. 529 Plans can be a win-win way to fund higher education, while saving taxes and — in some cases — reducing potential estate taxes. Please consult with your tax or financial professional to see if a 529 Plan makes sense for your family.