Many employees tend to overlook the potential benefits of health savings accounts (HSAs) during their annual open enrollment period. HSAs, when paired with qualifying high-deductible health insurance plans, serve as a 401(k) for medical expenses. Surprisingly, only 29% of employees currently own an HSA through their employer, despite 45% of employers offering this option, as reported by MetLife’s 21st Annual U.S. Employee Benefit Trends Study (2023).

One common misconception about high-deductible plans is that they lead to higher overall medical costs. On the contrary, an analysis conducted by Voya Financial, based on common employer plan designs, revealed that in 2018, 75% of individuals would have spent less with a high-deductible health plan. The deductible amount represents the out-of-pocket expenses patients must cover before insurance kicks in to pay for covered services. Despite this, individuals with greater medical needs often avoid higher-deductible plans.

Unfortunately, the term “high-deductible plan” itself is misleading and acts as poor branding, according to Nate Black, vice president of health solutions product at Voya Financial. High-deductible plans actually feature lower monthly premiums compared to traditional lower-deductible plans. Combining the savings from lower premiums with any contributions made by employers to employees’ HSAs, most individuals come out ahead in a high-deductible health plan paired with an HSA.

Even older adults, who typically have higher medical costs than their younger counterparts, can benefit from this combination. Voya’s analysis considered an employer HSA contribution and found that 69% of people aged 55 to 64 would have spent less with a high-deductible health insurance plan.

In conclusion, health savings accounts offer a powerful tool for saving on healthcare costs both now and in retirement. With their potential for significant savings, employees should give HSAs the attention they deserve during their annual open enrollment period.

The Power of HSAs for Retirement Planning

Did you know that a simple switch to a high-deductible health plan can have a significant impact on your retirement savings? According to Voya, a 40-year-old individual who opts for a high-deductible plan and manages to save $481 each year until retirement could potentially accumulate an additional $27,973 by the time they turn 65. Of course, this assumes that they make pretax contributions to a retirement account or Health Savings Account (HSA) that earns a 6% return.

HSAs offer an excellent opportunity to grow your savings at a faster rate than a traditional savings account. Similar to 401(k)s, HSAs provide favorable tax treatment. Contributions are made tax-free, the growth is tax-free, and withdrawals for qualifying medical expenses can also be made tax-free, both now and in retirement. In contrast, retirement account contributions are usually taxed either upon deposit or withdrawal, depending on the type of plan. Additionally, unlike flexible spending accounts, there’s no time limit or risk of losing contributed HSA funds.

For 2024, the Internal Revenue Service has set the minimum deductible for high-deductible plans at $1,600 for individuals and $3,200 for families. Furthermore, the contribution limit for HSAs in 2024 is $4,150 for individuals and $8,300 for families.

One great advantage of HSAs is their portability. Even if you leave your job or are no longer enrolled in a qualifying high-deductible plan (including Medicare recipients), you can still retain your HSA and withdraw funds as needed.

An HSA can prove to be incredibly valuable when it comes to covering expenses that traditional Medicare doesn’t cover, such as hearing aids and dental implants. Michelle Griffith, a senior wealth advisor with Citi Personal Wealth Management in Chicago, describes the HSA as the “best-kept secret” in terms of retirement planning.

Interestingly, as of the end of 2021, the average HSA balance for customers who had invested their accounts and reached the age of 65 was $43,000, according to Jason Kessler, the chief experience officer at HSA Bank.

Indeed, HSAs offer individuals a unique opportunity to save for retirement while enjoying tax advantages. With proper planning and consistent contributions, you can make a significant difference in your future financial well-being.

Note: To explore further or seek personalized advice, consult a financial advisor.

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