Health Savings Accounts Could Help
Boomers Invest For Retirement
Some boomers may be able to protect themselves against unexpected medical expenses and beef up their retirement nest eggs by opening health savings accounts.
Many commentators have implied that HSA holders will be emptying their HSA asset accounts each year or socking their HSA assets away in bank accounts that will earn a very low interest rate. But, in theory, boomers should be able to invest HSA assets in roughly the same types of products they include in their 401(k) plans or individual retirement accounts.
Healthy boomers could use HSAs to give their retirement savings a significant boost, and boomers who get sick may like having the ability to take out cash without worrying about all the red tape and penalties involved with hardship withdrawals from ordinary retirement plans.
State Bank of Howards Grove, Howards Grove, Wis., a company that has converted its medical savings account custodial account program into an HSA account program, has found that the share of HSA clients who invest account assets in vehicles other than traditional bank accounts has dropped to about one-quarter, from about one-third when the tightly restricted MSA pilot program for small businesses and self-employed taxpayers was the only game in town.
We have seen that [percentage] drop a little just because the HSA has a little different market, says Becky Pahl, State Banks marketing director.
Most of the MSA holders were self-employed people. Today, employers are starting to make HSAs available to employees, Pahl says.
But one-quarter of State Banks health account customers do choose non-vanilla account options, and John Valines, president of Health Savings Administrators L.L.C., Richmond, Va., an HSA plan administrator, says a firm service that provides access to no-load mutual funds from Fidelity Investments, Boston, is already extremely popular.
Although HSA fund investments are not for everybody, at Health Savings Administrators, our clients want to go [into funds] from the first dollar, Valines says.
The typical HSA fund investor is a healthy, risk-tolerant boomer with no children or grown children who is interested mainly in long-term asset growth, according to Fred Adams, vice president of marketing at HSA for America, a Fort Collins, Colo., health insurance broker.
Theyre not worried about paying a few doctor bills out of pocket, Adams says.
A 40-year-old boomer who starts an HSA today, seldom if ever gets sick, contributes an average of $2,000 per year for 25 years and earns an average rate of return of 10% could accumulate more than $200,000, according to a savings calculator on the Web site of the Employee Benefit Research Institute, Washington.
Even if inflation cuts the real rate of return to 5%, the boomer could end up with the equivalent of more than $90,000 in 2004 dollars.
President Bush brought HSAs to life Dec. 8, 2003, when he signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003. One section of the act replaces the MSA pilot program with the new HSA program. The HSA program lets eligible taxpayers who buy high-deductible health insurance policies exclude HSA contributions from taxable income and spend HSA cash on qualified expenses without paying income taxes on the distributions.
Boomers can spend the cash as they go along, or they can keep the cash in the accounts until they retire. Healthy retirees who are lucky enough not to need the HSA assets to pay for medical expenses can take out cash, pay income taxes on the distributions and spend the money however they want.
Moreover, the HSA program can be an even better deal for boomers over age 54 than for younger taxpayers, because the HSA law includes special, higher deductible and contribution limits for taxpayers ages 55 to 64.
For 2004, for example, the maximum contribution for a young taxpayer with a family HSA is $5,150.
If both spouses are at least 55 and both have high-deductible health coverage, the maximum contribution is $6,150, according to the IRS.
Insurers that sell HSA-compatible policies can provide low-deductible or no-deductible coverage for routine preventive care, such as mammograms. The IRS also has stated that employers can combine HSA programs with employer-funded, low-deductible health reimbursement arrangements that provide coverage for dental care or vision care or cash to pay for post-retirement medical expenses.
Boomers who open HSAs can buy separate, no-deductible or low-deductible accident insurance, disability insurance and dental insurance policies. Those policies could help the boomers pay some medical bills without tapping HSA assets or other savings.
In general, though, exceptions to the high-deductible requirement are limited. The authors of the HSA law want HSA holders out-of-pocket costs to be high enough to discourage them from running to the emergency room every time they get a cold.
The program rules may prevent boomers who have low-deductible, employer-sponsored health coverage from starting HSAs, and many boomer clients who can choose between traditional coverage and HSA-compatible coverage prefer traditional coverage, Adams says.
On the other hand, some cautious boomers always have budgeted for unexpected medical expenses, and the HSA program rewards those taxpayers for doing what theyve been doing all along, experts say.
Here are some considerations for advisors who have boomer clients who might want to use HSAs as retirement savings vehicles:
?Health insurance agents and brokers without securities licenses can refer clients to sources of advice about HSAs but should avoid offering HSA investment advice.
?Some clients might decide to use bank accounts protected by the Federal Deposit Insurance Corp. to build up enough HSA assets to cover the cost of their annual deductibles or some multiple of their deductibles. The clients then might invest assets over that amount in riskier vehicles that offer a higher rate of return.
?Clients can invest HSA cash in stocks, bonds and the federal government’s Treasury Inflation Protected Securities, as well as in mutual funds.
?If inflation rises, investing a high percentage of HSA assets in TIPS might turn out to be safer, especially for younger boomers, than putting the assets in checking accounts and savings accounts that offer little protection against inflation.
?Many banks, insurers and other would-be HSA trustees still are setting up their HSA programs. That means boomers who want to keep their HSAs at their neighborhood banks and adventurous boomers who want to spice up their HSAs with cattle futures may have to wait.
?HSA administrators are just starting to adopt card-based systems that HSA holders can use to withdraw assets from mutual funds held within HSAs. A boomer who wants to be able to whip out a card to pay for a doctor?s visit next month might be happier starting out by putting HSA cash in a checking account or a savings account.
Reproduced from National Underwriter Edition, May 21, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.