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HSAs offer benefits far beyond health care

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People simply don’t think of health savings accounts as a long-term option. As a result, they overlook HSAs’ value as a long-term savings tool.

That’s one finding in a study from UMB Healthcare Services, which found that not even one percent of people in the study maxed out their allowable contributions. People are so used to using HSAs the same way they use their flexible spending accounts (FSAs)—which are bound by use-it-or-lose-it rules—that they overlook the long-term nature of HSAs.

The study builds on an HSA Consulting Services white paperrecently released that pointed out the benefits of long-term investing within an HSA as a potential retirement savings tool.

The UMB report said that, in a study of 175,000 HSA holders, the average balance was just $1,800, with an average annual contribution of only $1,016 annually.

That’s quite a bit less than the 2015 maximum allowable contribution of $3,350 for individuals or $6,650 for families. (Those over 55 can add an additional $1,000 to those amounts.)

And when you consider that those amounts are deductible from gross income, you realize that people are missing out on a real bonanza by not taking full advantage of these accounts.

While HSAs are designed to pay for current and future medical costs, a Fidelity study put the average annual cost of out-of-pocket healthcare costs for the average healthy couple retiring at the age of 65 in 2014 dollars at more than $220,000. That’s after Medicare, and does not include long-term care costs.

The UMB paper offered an example of how HSAs can help: “If a 40-year-old employee earning $80,000 today makes maximum HSA contributions, assuming a 5 percent return, the HSA alone will have more than $306,000 by age 65—enough to cover that average retired couple’s health expenses.”

Despite the fact that HSAs “offer multiple investment options, including money market funds, self-directed accounts for mutual funds or individual stocks and FDIC-insured accounts for cash needs,” the paper said, “only around 1 percent of the HSA holders we studied used the available investment options.”

They also miss out on the triple-tax-free features of HSAs: tax benefits at deposit, during the account’s life and on withdrawal.

If employees are better educated about the advantages of HSAs, the paper concluded, they’ll be better prepared for retirement.