Fidelity Investments, one of the world’s leading providers of financial services, studied account holders and concluded that those who save with both Health Savings Accounts and 401(k) retirement plans have bigger balances at the end of the year than people who just have one or the other. People who prepare for the escalating costs of health care know that a 401(k) retirement fund is not enough. Thus, a Health Savings Account (HSA) is a must.
For many, a 401(k) retirement fund is similar to an HSA, but these two options have vast differences. And, the HSA benefits really outweigh those of the 401(k). While a 401(k) is especially designed as a retirement account that can be withdrawn indiscriminately when you reach age 59 1/2, a Health Savings Account has the benefits of both a 401(k) and health insurance that’s, well, on the thrifty side. That’s because it makes most types of health-related care, even dental, tax deductible. Many people open a Health Savings Account as an alternative retirement fund because the funds in the HSA are much more available to use for health care. You can withdraw before and after retirement with no penalty, as long as you withdraw for “qualified” health care. And, that money is never taxed.
To better understand the needs of account holders, Fidelity Investments have classified their account holders as: Savers, composing 23 percent of their entire HSA membership; Spenders, composing 33 percent of entire HSA membership; and Hybrids, composing 44 percent of total HSA membership. The Savers only spend ten percent of their yearly contribution and leave the rest for retirement expenses. The Spenders, on the other hand, use up 90 percent of their annual contribution to pay for qualified medical expenses. The Hybrids are a mixture of both. They spend part of their annual contribution, but also leave some for retirement.
Among these groups, Fidelity Investment found that those who are earning $40,000 to $60,000 annually and save only in one account, either an HSA or a 401(k) plan, have around $46,100 as a total year-end balance. Those who save in both an HSA and a 401(k) have a year-end balance more like $63,600 on the average. Thus, having two accounts appears to provide a better chance of financial stability when you retire.
Wiley Long is President of HSA for America, and a passionate advocate for consumer-based solutions that will improve price transparency and lower health insurance and medical costs for people purchasing individual and family health insurance plans.