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Using Your Health Savings Account to Boost Your Nest Egg

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One good savings habit apparently begets another.

If you stash money in a health savings account, you’re more likely to make big 401(k) contributions as well.

Fidelity Investments has found that 401(k) account-holders with HSAs accrued more than twice as much in their 401(k)s as the average account holder. At the end of 2010, the average 401(k) balance administered by Fidelity was $71,500; for those also contributing to an HSA, the average balance was $170,500.

And it’s not just happening among well-off savers looking for tax shelters. The average 401(k) balance for a participant earning $20,000 to $40,000 a year was $19,000 at the end of last year. But for those with HSAs as well, it was $30,000 – 59% higher.

The trend was the same among workers making $100,000 to $150,000. They had an average 401(k) balance of $159,000 – or $260,000 if they were also making HSA contributions.

What’s the big deal about HSAs? If your employer switches you to a so-called high-deductible health plan, you’re generally also allowed to contribute to an HSA – up to $3,050 for an individual with self-only coverage in 2011, and up to $6,150 if you have family coverage.

It might be the silver lining, at least when it comes to your tax bill. You can make contributions with pre-tax income, any earnings are tax-free, and funds from the account used to pay for qualified medical expenses generally are not taxable. Any money left in an HSA at the end of the year continues to be invested, meaning you potentially could stockpile pre-tax dollars to pay for medical expenses into retirement.

If you withdraw the money but don’t use it for qualified medical expenses before retirement, you owe income tax and a 20% penalty. But if you withdraw the money after you retire and use it for non-medical expenses, you owe income tax but no penalty, according to William Applegate, a Fidelity vice president.

So far, that seems to be the goal of many HSA holders at Fidelity: A quarter of its HSA account holders spend less than 10% of their annual contributions, allowing the balance to be carried over for future medical expenses, the firm says.

You may find yourself among those being offered the accounts: The number of HSAs grew 27% in 2010 to 6.2 million, Fidelity says. Some employers, trying to nudge workers into this new type of health-care coverage, have started offering an HSA match, similar to incentives offered for saving in 401(k)s. Fidelity says that 83% of the HSA plans it administers provide some level of employer contributions to participants – slightly higher than the 79% of employers who provide a 401(k) match.

You can read more about HSAs in this Internal Revenue Service publication.

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    • And William, most of what you’ve said made no sense.

      First, of course HSAs would provide more advantages to those in higher tax brackets. So would 401k, 457s, Roth IRAs, 529s or any other tax-beneficial account. If you are among the bottom 50% of American earners, you are living free off the government and paying no income taxes at all. You get all of your money back in the form of a refund check, the standard deduction and tax credits. Surely, it makes sense that those who pay no taxes really see no benefit in an account that would save them money on taxes.

      If your similar plan has a lower premium than an HSA plan with the same deductible, then go with the other “similar” plan. It most likely is also an HSA-eligible plan, as what qualifies the plan is the high deductible.

    • William, if your HSA is charging a custodial fee, then you are not looking hard enough, dude. You remind me of the people who whine and complain about big branch bank fees but haven’t heard of no-fee credit unions, which have been around for decades. Since you’re on the Internet, shop around. There are plenty of no-fee HSAs. Alliant Credit Union and Stanford Federal Credit Union are two good examples, and they both pay much higher interest than checking accounts, sometimes comparable to certificates of deposit (CDs).

    • I don’t see the advantage to the average worker. The custodial fees charged by most plans that I have seen eat up any paltry return now being offered. Most HSA qualified plans have higher premiums than comparable plans with the same deductibles. The HSA seemed designed to benefit those in the higher brackets that have maxed out other tax favored plans.

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.

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