Seeking Alpha

Barron's On Health Savings Accounts

by: Roger Nusbaum
Roger Nusbaum
Portfolio strategy, ETF investing, foreign companies

It's not too late to start saving for retirement.

HSAs are an important tool for any retirement plan.

Withdrawal strategies are also vital for retirement plan success.

Barron’s had a nice primer on HSA accounts although I am not sure why the title referred to them as "hidden." The first post I can find in my archive on HSAs was from January 2005. Side note: I’ve been blogging for an awfully long time. I’ve been a huge fan of HSAs from the first time I ever heard of them.

One useful nugget from Barron’s; there is a $1,000 catch-up contribution starting at 55. With so many people being undersaved, the idea of starting an HSA at 55 and being able to accumulate $77,000 by 65 years old in addition to any other savings vehicles is a great thing. Assuming another $6,500 per year into each partner’s IRA, then a couple with nothing at 55 is looking at $210,000 at 65 plus whatever growth rate you want to assume.

We hear repeatedly how people have nothing accumulated to retirement. I find it very encouraging that it really isn’t too late to start. Not everyone in this circumstance would be able to start socking away $21,000 per year, but those who find they can will go a long way to improve their situation. The average Social Security check is $1,404, making a potential $2,808 for a couple where each partner takes own benefit. That seems like a decent amount but would be tough to handle one-off, unbudgetable events that seem to come every month (last month we had a large vet bill; this month we have a bat issue to deal with). That $210,000 saved (plus whatever growth rate you want to assume) between 55 and 65 could generate $700/month (assuming the 4% rule) or simply cover those one-offs. This certainly wouldn’t be an opulent retirement but would be vastly improved. Throw in a monetized hobby that earns about $500 a month and they’re all the better off.

In past posts, I’ve made the argument that HSAs should be the first thing you contribute to other than a 401(k) such that you at least get the most out of the employer match. One of the benefits of an HSA that most people know about is that there is no tax owed on distributions used on qualified medical expenses, but the Barron’s article articulated this point very effectively by saying (paraphrased in my own words) that if you have a $10,000 medical event and you pay for it out of a traditional IRA, you would need to actually withdraw $13,333 to cover the $10,000 (assuming a 25% tax rate). Withdrawn from an HSA, you’d only need to take out $10,000. Stating the obvious, that makes it much cheaper. Other important items include the contributions being tax deductible, there are no income limits, you don’t need earned income to make a contribution and there is no RMD.

In case it is not clear, starting at age 65, you can make withdrawals from HSAs for non-medical needs, but there is tax owed same as a traditional IRA.

In terms of prioritizing withdrawals from an HSA versus other accounts, I would start with taxable account first (capital gains may have to be managed). If the taxable account were depleted before age 70, I would take from my Roth IRA (withdrawals not taxable) until the RMD kicks in on the traditional IRA (a SEP IRA in my case). I don’t think I would ever take from the HSA except for a medical situation or if all other accounts had been depleted. Using the Roth, if needed, is a change in my thinking as opposed to going from the taxable account to the traditional IRA but why pay tax on withdrawals for a couple of years if you don’t have to?

A final point about spending down assets in the above paragraph are two references to accounts being depleted. This is something we have talked about before and may be very uncomfortable, but a successful withdrawal strategy probably includes spending accounts down to nothing and moving on to other types of accounts. A retired couple with an $800,000 nest egg implies $32,000 a year assuming the 4% rule. If that couple has $200,000 of it in a taxable account, in terms of tax efficiency, it may make the most sense to take all $32,000 from that taxable account every year until depleted. No tax paid, and the other accounts have the opportunity to keep growing.

With a nod to the joke about economists, if you got 10 different advisors in a room, you’d probably get 11 different opinions about withdrawal strategies and of course there are countless variables in people's unique situations that could dictate much different courses of action.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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