Even Better than Roth IRA? HSA Is Best Retirement Tool

While the Roth IRA has long been touted as the best retirement vehicle available, I would argue that something is slightly better. And that would be the health savings account (HSA).

What is a health savings account (HSA)?

Accounts created "so that individuals covered by high-deductible health plans could receive tax-preferred treatment of money saved for medical expenses" (treasury.gov). Signed into law in 2004 as part of the Medicare Prescription Drug, Improvement, and Modernization Act by President George W. Bush. 

How does it work?

Similar to pretax 401(k)s and Traditional IRAs, contributions to HSAs are tax-free and grow tax-free, and are typically set up through one's employer. HSA withdrawals, however, also allow tax-free withdrawals on eligible health expenses, unlike Traditional IRAs and pretax 401(k)s.

Why is this better than the Roth IRA?

HSAs are the only accounts that offer the "triple tax advantage" of tax-free contributions, tax-free growth, and tax-free withdrawals for qualified expenses. Roth IRAs allow for tax-free growth and withdrawals, but contributions are taxable.

A local leader in HSAs and healthcare solutions is Pinnacle Bank. Adam Hewitt, employer healthcare solutions product manager, SVP, with Pinnacle Health & Benefits, describes the HSA as "one of the best retirement tools. Period. In most life situations, an HSA can help. It helps save taxes when a budget is tight. And it’s a great retirement tool when the budget has flexibility.”

How much money can it save?

An average family can save around $2,000 a year, or $1,000 for a single. This assumes a 22% tax bracket and includes payroll taxes saved. Families can currently contribute $7,100 a year and single can contribute $3,550.

How is it different from an FSA?

While there are several differences, the primary differences are: FSA funds expire every year ("use it or lose it") while HSA funds do not.

Special tip 

Many individuals spend all of their HSA funds every year. If your budget allows, however, consider paying for medical expenses out of pocket. There is no time limit to submit qualified expenses that you pay for out of pocket. As long as you keep your receipts, you can save and invest the money you would have spent until you are either no longer enrolled in an HDHP plan or turn 65 and enroll in Medicare. The account's additional growth from doing this could be used for medical expenses (and long-term care premiums) in retirement. This will only allow for more tax savings in retirement.

How do I qualify for an HSA?

The major qualification is participating in a high-deductible health plan (HDHP), which is roughly half of employment-based coverage today, according to cdc.gov. HDHPs have required minimum deductibles of $1,400 for single or $2,800 for family. 

Where can I open one?

Several banks offer HSAs. One option is Pinnacle Bank, which has expanded its HSA platform in the last two years. Ranked No. 14 on FORTUNE Magazine's 100 Best Companies to Work For in 2020, Pinnacle offers HSAs with a low fee structure, debit card, and provides an app with a barcode scanner (to help identify HSA-eligible products), and plenty of investment choices.

While the HSA is only 16 years old, it will very likely it will continue to be more and more prevalent in the future of personal finance. Not only does it save taxes for medical expenses, but it can also be "the best retirement tool. Period."

Hunter Yarbrough, CPA, CFP®, is an executive vice president and financial adviser with CapWealth. He is passionate about taking a holistic view of personal finance, including investments, taxes, retirement, education, estate planning, and insurance. For more information about Hunter and CapWealth, visit capwealthgroup.com.