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Portfolio > Investment VIPs

3 reasons why HSAs might explode

By Marlene Y. Satter

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Health savings accounts are poised for tremendous growth, according to a new white paper that points to an underused feature: investing within an HSA for long-term tax-free growth.

The white paper, from HSA Consulting Services, LLC in conjunction with Avidia Bank HSA, said that while 20 million Americans are covered by an HSA-qualified plan that allows them to fund their healthcare with an HSA, very few people who have an HSA actually are aware of the feature, much less are using it to help pay for healthcare in retirement.

The paper cited research by Devenir Group that found only about 3 percent of HSA accountholders invest within that account—but those 3 percent among them account for 19 percent of total HSA assets. And that’s up from just 12.8 percent in 2011.

That might sound impressive, but the paper projects something even more impressive: that growth will fairly explode in years to come.

Currently HSA assets hover around $3 billion, but the paper said, “HSA investments could grow to $11.5 billion by 2017 and to $40 billion by 2020, averaging just north of 50 percent per year compound annual growth.”

Three factors could spur this growth:

  1. Demographics, which will “bring millions of newly opened accounts into the prime investment range in the next several years.”

  1. Market growth inside accounts, which will be considerably faster than bank accounts tied to currently low interest rates.

  1. HSA investment education is improving, and should continue to do so “as more investment firms and advisors enter the space.”

All that education will make people realize, it said, the “‘triple tax savings’ combo of immediate tax relief from income and FICA taxes, tax-free growth, and tax-free withdrawals,” along with the ability to pass the account along to a spouse as a functioning HSA or to any other heir as part of the estate in the case of the account owner’s death.

While currently people view the dilemma of paying for health care a single year at a time, increasing use of HSAs will encourage them to take a longer view.

That in turn will perhaps condition them to viewing investments inside their HSAs as similar to the investments inside their retirement accounts.

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