Are health savings accounts simply better than 401(k) plans?
While there’s no simple answer, a leading authority is quick to point out the unsung potential of HSAs as a long-term investment vehicle at a time when some critics have suggested the 401(k) plan model provides insufficient savings.
“HSAs are the only investment savings vehicle in America that has triple-tax advantage; namely that the money contributed goes in on a tax-free basis, the earnings on that money are not taxed and the money that comes out of the account is not taxed,” explains Kimberly Sexton, vice president of Total Benefit Communications, LLC. In contrast, she notes, 401(k) distributions are taxed and Roth IRA contributions require an upfront tax.
Her views will be showcased in a workshop entitled “HSAs, the New 401(k)s” at the EBN-produced 25th annual Benefits Forum & Expo Sept. 9-11 in Phoenix, Ariz.
In the event that there is no 401(k) plan company match, Sexton says plan participants are better off putting their money into an HSA whose balance can be rolled over from one year to the next than a 401(k) because of the aforementioned tax advantages. But Sexton is reluctant to criticize 401(k) plans, which she has been promoting for 20 years.
HSAs can serve as a substantial rainy day fund that supplements the ability of taxpayers to deduct medical expenses that exceed 7% of their annual gross income. The magic of compound interest can certainly help account holders walk away with a substantial sum at retirement. For example, she notes that a $5,000 annual contribution earning 6% a year for 25 years would generate $290,782 in savings.
HSAs represent “a wonderful way” to pay for medical expenses considering that Medicare doesn’t kick in until age 65, according to Sexton.
So why isn’t every employee taking full advantage of an HSA whenever it’s offered?
She believes these accounts are “a harder sell for employees who are not saving for retirement in any way, shape or form because they just don’t have that kind of money,” while highly compensated individuals understand and appreciate the concept.
There are some other interesting selling points about HSAs that need to be communicated, Sexton says. One such issue involves covering an adult child who is under the age of 26 who is married and has a child.
“The husband and wife may contribute the family contribution to the HSA, including catch-ups as appropriate,” she explains. “The adult child may also contribute the family limits. And it doesn’t have to be the adult child that puts that money in; it can be the parents who put that money in on behalf of that child to be used for their spouse and child as well.”
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Bruce Shutan, a former EBN managing editor, is a freelance writer based in Los Angeles.
