Health savings accounts could help generate huge sums to offset health care costs in retirement, at least for some Americans, according to the Employee Benefits Research Institute.
Contributing the maximum amount to an HSA for 40 years, without withdrawing savings, would accumulate $360,000 at a rate of return of 2.5 percent, $600,000 at 5 percent, and almost $1.1 million at 7.5 percent, according to an EBRI analysis.
The potential savings HSAs could generate are assumed under best-case-scenario circumstances.
Of course, “many individuals may not have the means to both save in an HSA and pay their out-of-pocket health care expenses,” said Paul Fronstin, director of EBRI’s Health Research and Education Program and author of the report on HSAs.
By most analysts’ accounts, health care inflation is expected to catapult in the coming decades. A recent HealthView Services study examined the Medicare premiums of a hypothetical couple living in Massachusetts, aged 55 and expecting to retire at 65. Their Medicare premiums are expected to double to $22,981 in 2034 when they would be 75, and to $46,568 in 2044, when they would be 85.
Still, the EBRI report points out the tax advantages to HSAs, and suggests that because of them, investors may find the accounts more beneficial than simply using a portion of one’s 401(k) to cover health care costs.
Contributions to HSAs reduce taxable income, the earnings on them build up tax-free, and the distributions for qualified medical expenses are not taxed.
Nonetheless, to commit an HSA specifically for growing assets to fund future health care costs may be an option best-suited for higher earners, people who can contribute to their 401(k) at a healthy clip, pay their current out-of-pocket medical expenses with cash, and fund an HSA.
