Healthcare in America, especially for older clients who live increasingly longer lives, is frighteningly expensive and seems to get more so every year.
Enter the health savings account, a tax-advantaged vehicle that can help many working Americans better plan for their medical and financial futures. It’s a savings and investing account that Americans are becoming more aware of, but often still fail to make full use of, advisors say.
“The HSA offers the unique advantage of being a triple-tax-free account, providing valuable tax benefits that can enhance the overall effectiveness of a retirement strategy,” said Ashley Folkes, the founder and managing partner of hybrid RIA Inspired Wealth Solutions in Hoover, Alabama.
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The HSA, which an individual can contribute to if they’re enrolled in a high-deductible health plan, among other criteria, can be used prior to age 65 to pay for qualified medical expenses such as doctor visits, dental treatment, vision services and prescription drugs, as well as a host of other health-related expenses. It also packs a punch as an investing vehicle for retirement because it trumps several other well-known retirement accounts, like the 401(k) and Roth IRA, for its tax-saving perks.
First, HSAs can help clients get an initial tax break by lowering their pretax income when they contribute. Second, the accounts can grow tax free. Third, clients can take withdrawals tax-free for “medical expenses later in life, when healthcare is expected to make up a larger portion of overall household spending,” according to David Tenerelli, a financial planner at Strategic Financial Planning, a fee-only RIA in Plano, Texas.
“When their cash flow allows for it, we encourage clients to treat their HSA as a long-term investment account — a ‘medical IRA’ — and to pay for current medical expenses out of cash flow,” Tenerelli said.
But the problem is that “relatively speaking, if you compare it to other types of accounts, the contribution limits are relatively low,” Ben Storey, senior retirement products manager in the Retirement and Personal Wealth Solutions group at Bank of America, said in an interview. “That creates less of a focus due to those lower limits. And especially when you look at high net worth clients, this may be a small percentage of their overall net worth.”
Currently the maximum allowed HSA contribution in 2023 is $3,850 for individual coverage and $7,750 for family coverage, with the opportunity for an additional catch-up contribution of $1,000 if the account holder is aged 55 and older. The deadline to contribute for 2023 is April 15, 2024, so clients still have time. In 2024, that limit will grow to $4,150 for individuals and $8,300 for families, with the same catch-up allowance.
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Legislation pending in Congress could roughly double the limit of what’s currently allowed for contributions, making them a somewhat better deal.
Storey said Bank of America’s 2023 workplace benefits report found that a majority (73%) of surveyed American employees are contributing to HSAs, and 83% of employers contribute to their employees’ HSAs.
“This is certainly increasing,” he said. “However, with that being said, they’re not necessarily maximizing the potential benefits.”
A majority of employees (64%) were making regular withdrawals from those accounts, he said.
“Really what they’re doing is, they’re limiting that long-term growth potential for their savings …. One of the issues is really the fact that the individuals look at this as more of a spending account versus a savings account.”
Financial Planning spoke with experts from across the industry and compiled tips on what financial advisors should know about working with clients on HSAs.