Do you have a SARSA?

Have you heard of the SARSA? The ‘Super Awesome Retirement Savings Account?’ No, you haven’t because it doesn’t exist. Instead, it’s stupidly called a ‘Healthcare Savings Account’. Do you have one? Are you maxing it out ($3,600 single, $7,200 family) and not spending it? You should. 
 
The HSA is America’s best kept retirement planning secret. It’s available to anyone with a High Deductible Health Plan which is (just barely) most Americans. But participation and savings levels are dismal. Only a third of the eligible sign up, and more than half of those have not contributed in 12 months. And most of the remainder drain the accounts annually. Does education help? No, the findings say having a master's degree or a high level of health insurance literacy reduced the likelihood of contributions. Ouch. 

We can be forgiven, I suppose, because of the name. ‘Healthcare Savings Account’ sounds like ‘Flexible Savings Account’ but they are very different. My suggestion, ‘Super Awesome Retirement Savings Account,’ got nowhere in Congress. 

How is a health savings account a retirement strategy? 

For one thing, it is the most tax advantaged account we have in the USA. It’s got the trifecta of tax savings – no tax (or FICA) going in, no tax while it accumulates and no tax coming out as long as it’s for qualified expenses. Over 20 years, an HSA dollar would return ~43% more than a 401k dollar because of the triple tax savings. (Assumes 6% returns and a 30% marginal combined tax rate on the 401k) 

Oh there’s the catch (spoiler: it’s not much of a catch). What’s a qualified expense? A qualified expense includes most health care expenses including Medicare premiums (~$3k per year per person in 2021), dental, vision, and the miscellaneous costs like co-pays. Medical expenses are a huge part of the average retirement budget. Fidelity says a couple will need $300,000 for healthcare expenses at age 65. I’m guessing the expense will continue to climb. It’ll be the rare person that over-saves in an HSA. (If you don’t use it for medical expenses, you will pay taxes and possibly a 20% penalty, so don’t do that.) 

If you have an HSA, use it as a retirement plan, not for current spending. Consider reducing your 401k contributions if you need to, it could be worth it. And if you want to save more, take a look at our sheet outlining various types of advantaged accounts for savings.