MAKING THE MOST OF YOUR HSA. How to set aside money for now in your Health Savings Account while still investing for the long term

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1 MAKING THE MOST OF YOUR HSA How to set aside money for now in your Health Savings Account while still investing for the long term

2 MAKING THE MOST OF YOUR HSA / 2 Your HSA isn t use it or lose it. So consider investing it. An HSA can be a great tool to help pay current qualified medical expenses. But it also can help you save and invest for the future. Unlike Health Flexible Spending Accounts, any HSA money you don t use in a given year remains yours, and can be saved for health care expenses until you need it even if you are fortunate enough not to need it for many years. Most people are unaware of how much money they might need for health care expenses in retirement. And because an HSA lets you save and invest tax-free, 1 it can be one of the best ways to pay for health care expenses, even those you ll have in retirement. At first, it may make sense to keep your money in cash. But as your HSA balance builds, ask yourself: How much cash do I need? And how can I invest the rest? Be prepared, not surprised A couple retiring in 2017 at the age of 65 will need an average of $275,000 to cover their health care expenses in retirement. 2 And that s for what Medicare doesn t cover. 3 in 10 know the HSA is not subject to the use it or lose it rule, so if you weren t sure, you re not alone. 3

3 3 / MAKING THE MOST OF YOUR HSA W H Y INVEST Investing the money you don t use to pay for current medical expenses can help your HSA grow over the long term. Plus, you can take full advantage of the account s triple tax savings because potential investment gains aren t taxed as long as the money is used to pay for qualified medical expenses. Average HSA balance 4 among those who... Super-saver strategy If you re able to put the maximum amount into your HSA, and you have other money available for health care expenses, you may want to consider investing all of the money in your HSA for health care expenses later in life, even in retirement, including Medicare premiums, copays, deductibles, and prescription drugs. Hold 100% of their HSA in cash $2,500 Include other investments in their HSA $14,000 76% withdrew less than they contributed to their HSA in % invested their HSA money in something other than cash. 4 The triple tax advantage Contributions are not subject to federal income tax. Investment earnings and interest grow tax-free. Withdrawals are not taxed as long as you use the money to pay for qualified medical expenses.

4 MAKING THE MOST OF YOUR HSA / 4 S E T Y O U R C A S H TARGET The first decision you make each year is how much to contribute to your HSA. Because of the unique tax benefits, generally speaking you ll want to contribute as much as you can up to the maximum. Of course, take into consideration other goals like retirement, debt reduction and establishing an emergency fund when deciding how much to contribute. The next decision is one many people don t even think about: How much cash do you want to keep in your HSA? This is your cash target, and the decision is important, because any additional money can be invested for the future. Most people will want to use their HSA for at least some of their current health care expenses. For that reason, many people find they are more comfortable keeping part of their HSA in cash. To figure out how much cash you might need, ask yourself these questions: How much is my deductible? Your health plan deductible is the amount you owe for covered health care services before your plan begins to pay. Can I pay my health care expenses without using my HSA? If you are making the maximum contribution and can afford to pay your current medical expenses from another source, you may want to consider investing your entire balance. In this case, you can view your HSA as a long-term investment. What do I expect in health care expenses this year? Does your family have predictable health care expenses for the coming year? How much will you owe under your health plan for those expenses? What is the most I could owe under the plan? The maximum you could owe under your health care plan is known as the out-of-pocket maximum.

5 5 / MAKING THE MOST OF YOUR HSA Using your answers as a guide, how much cash to hold in your HSA is mostly a matter of how much you think you will need for health care expenses. If you expect little or no health care spending, you may be comfortable keeping an amount equal to your plan s deductible in cash. Some might be comfortable with even less. If you know you could have health care expenses that will exceed the deductible, you may want to keep more cash in your HSA. If you re not sure how much you ll spend, you may want to keep enough cash in your HSA to cover your full out-of-pocket maximum. Every health plan has one; it includes deductibles, co-payments and other in-network expenses, but it does not include premiums CONTRIBUTION LIMITS Maximum 55+ catch-up Individual $3,450 $1,000 Family $6,900 $1,000

6 MAKING THE MOST OF YOUR HSA / 6 INVESTT H E R E S T Once you ve set and met your cash need, how do you invest the additional money in your HSA? In general, you should select an investment with a target asset mix appropriate to your time horizon the longer you hope to let your HSA balance grow, the more aggressive you can be. Here are some guidelines: 6 AGE TARGET ASSET MIX EQUITY ALLOCATION Aggressive growth 85% Growth to aggressive growth 70-85% 51+ Balanced to conservative 20-50% Be aware that you may need to meet a fund minimum before investing. Keep in mind that investing involves risk. The value of your investment will fluctuate over time, and you may gain or lose money.

7 7 / MAKING THE MOST OF YOUR HSA SIMONE Age: 25 Balance: $4,000 Deductible: $1,500 Considerations: Simone has a medical procedure planned that she knows will cost $1,800 out-ofpocket, so she plans to keep $1,800 in cash in her HSA. Retirement: 40+ years away How to invest? Aggressive growth AMANDA Age: 45 Balance: $10,000 Deductible: $3,200 Considerations: With a chronic condition to manage, her family usually reaches their plan s $5,000 out-ofpocket maximum. Amanda will keep $5,000 cash in her HSA. Retirement: 20 years away How to invest? Growth to aggressive growth JOHN Age: 55 Balance: $15,000 Deductible: $3,000 Considerations: John s family has rarely hit their deductible, and John is confident he can cover expenses if he has a health-care emergency. John chooses to invest his entire balance. Retirement: Less than 10 years away How to invest? Balanced to conservative EXAMPLES Investment decisions should be based on an individual s own goals, time horizon, and tolerance for risk.

8 MAKING THE MOST OF YOUR HSA / 8 By the time an account holder has had an HSA for 7 years, 30% to 40% of assets are invested. 4 HOW TO Here are a few steps that will help you manage your HSA on an ongoing basis: Decide how much cash you want to keep in your HSA. Revisit this target every year in case your situation has changed. Contribute as much as you can afford every year, up to your maximum annual contribution limit. Invest any money over your cash target in an ageappropriate asset mix. As you use the cash in your HSA to pay current medical expenses, be sure to replenish your reserve. Cash target Time

9 1 Fidelity does not provide legal or tax advice. The information herein is general in nature and should not be considered legal or tax advice. Consult an attorney or tax professional regarding your specific situation. 2 Estimate based on a hypothetical couple retiring in 2017, 65-years-old, with life expectancies that align with Society of Actuaries RP-2014 Healthy Annuitant rates with Mortality Improvements Scale MP Estimates may be more or less depending on actual health status, area of residence, and longevity. Estimate is net of taxes. The Fidelity Retiree Health Care Costs Estimate assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government s insurance program, Original Medicare. The calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care. 3 The Fidelity-sponsored 2014 HSA survey conducted by GfK Public Affairs & Corporate Communications from April 30 to May 9, 2014, using GfK s KnowledgePanel, a nationally-representative online panel composed of 1,247 U.S. adults who are age 25-65, have a household income of $25,000 or more, have primary or shared responsibility for household financial decisions, and receive health care benefits through their own employer or their spouse s/partner s employer. Of these respondents, 332 self-identified as being enrolled in an HSA-eligible health plan. 4 Fidelity recordkept data of HSA accounts as of Dec. 31, With respect to federal taxation only. Contributions, investment earnings, and distributions may or may not be subject to state taxation. The triple tax advantages are only applicable if the money is used to pay for qualified medical expenses. 6 The target asset mixes presented were developed by Strategic Advisers, Inc., a registered investment adviser and a Fidelity Investments company, based on the needs of a typical HSA account holder. Keep in mind that investing involves risk, including the risk of loss. Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI,