Certified Plan Sponsor Professional (CPSP) Practice Exam

Why are health savings accounts (HSAs) gaining popularity as an alternative retirement savings plan?

1. They require no employer contribution.

2. HSA contributions offer a triple tax advantage.

3. They are automatically transferred to heirs.

4. They provide guaranteed growth rates.

The correct answer is: HSA contributions offer a triple tax advantage.

Health savings accounts (HSAs) are gaining popularity as an alternative retirement savings plan primarily due to the unique benefits offered by their triple tax advantage. Specifically, contributions made to an HSA are tax-deductible, which reduces taxable income for the contributor in the year the contribution is made. Additionally, the funds in the account grow tax-free, meaning that any interest or investment gains are not subject to taxes while they remain in the account. Finally, withdrawals made for qualified medical expenses are also tax-free, maximizing the financial efficiency of using HSAs for healthcare costs in retirement. This triple tax advantage makes HSAs an attractive method not just for covering current medical expenses but also for saving for future healthcare costs, effectively positioning them as a beneficial element of retirement planning. Individuals can save money now, see those savings grow without being taxed, and withdraw them later for specific qualified expenses without facing additional tax burdens. In contrast, the other options highlight certain characteristics of HSAs but do not capture the primary factor contributing to their rising appeal as a retirement savings alternative. While HSAs do not require employer contributions, are transferable to heirs under specific conditions, and can potentially earn investment growth, it is the triple tax benefit that fundamentally enhances their attractiveness for long-term savings.