Lifetime Accumulations and Tax Savings from HSA Contributions

2014 marks the 10-year anniversary of the introduction of health savings accounts (HSAs), created by Congress in 2003. In 2013, enrollment in HSA-eligible health plans was estimated to range from 15.5 million to 20.4 million policyholders and their dependents. Nearly 11 million accounts holding $19.3 billion in assets as of Dec. 31, 2013, were also estimated. The number of HSA-eligible enrollees will differ from the number of accounts for various reasons. The number of enrollees is composed of the policyholder and any covered dependents and will generally be higher than the number of accounts because one account is usually associated with a family. However, over time, the number of accounts can grow relative to the number of enrollees because when an individual or family is no longer covered by an HSA-eligible plan, they are allowed to keep the HSA open. HSAs provide account owners a triple tax preference. Contributions to an HSA reduce taxable income. Earnings on the assets in the HSA build up tax free, and distributions from the HSA for qualified expenses are not subject to taxation. Because of this triple tax preference, some individuals might find using an HSA as a savings vehicle for health care expenses in retirement more advantageous from a tax perspective than saving in a 401(k) plan or other retirement savings plan. This paper examines the amount of money an individual could accumulate in an HSA over his or her lifetime. It also examines lifetime tax savings from HSA contributions. Limitations of an HSA are also discussed. A person contributing for 40 years to an HSA could save up to $360,000 if the rate of return was 2.5 percent, $600,000 if the rate of return was 5 percent, and nearly $1.1 million if the rate of return was 7.5 percent, and if there were no withdrawals. In order to maximize the savings in an HSA to cover health care expenses in retirement, HSA owners will need to pay the medical expenses they incur prior to retirement on an after-tax basis using money not contributed to their HSA. Many individuals may not have the means to both save in an HSA and pay their out-of-pocket health care expenses. Also, HSA balances may not be sufficient to pay all medical expenses in retirement even if maximum contributions are made for 40 years