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How to help clients optimize Health Savings Accounts for retirement



Check out this article on healthcare costs in Financial Advisor:

As financial advisors and wealth managers know, there are lots of ways to help clients plan for retirement. Different strategies work better for some Americans than others, but most advisors agree that the most obvious strategies are maximizing investments in traditional retirement accounts such as 401(k)s and Roth or Traditional IRAs.

If your clients have the means, maximizing investments in these accounts is a smart strategy. However, there is another kind of retirement account that many consumers aren’t yet taking advantage of—health savings accounts (HSAs).

Much has been written about how these accounts can be used to pay for health-care expenditures tax-free, but savvy consumers are increasingly seeing the opportunity to use these accounts primarily as a tax-advantaged retirement vehicle.

Financial advisors are in a position to help clients better understand this option and how it can serve as another tool in their retirement strategy. Below are a few things advisors should know—and can help clients understand—about using HSAs as a retirement account.


HSA Basics

To open a HSA, consumers first have to be enrolled in an HSA-eligible health plan. In 2019, individuals will be able to contribute $3,450 per year, and families can contribute $6,900. Additionally, consumers 55 or older can contribute an extra $1,000 per year.

These funds roll over year to year and can be used for qualified health-care expenses. Once a consumer opens an HSA, the custodian will send a debit card. However, some financial planners or healthcare advisors actually advise never using the debit card at all.

Why? With good planning, this account can grow substantially over time, and after age 65, clients can withdraw the funds for any purpose and pay only income taxes.

In other words, for some consumers, the triple tax advantage and growth opportunity that these accounts provide are worth more than using HSAs as a specialized checking account for medical expenses.

Triple Tax Advantage

HSAs aren’t as widely understood as other retirement accounts. Many clients may not realize that funds contributed to the HSA can also be invested. 

Early contributions will benefit from compounding growth, and there are no capital gains taxes applied to returns.

That’s the triple tax advantage—contributions can be made tax-free, the funds grow tax-free, and the money can also be spent on medical needs without being subject to taxes.

If tax savings are really valuable to your clients, it may make sense for them to sign up for an HSA-eligible health plan, even if the client would otherwise be inclined to choose a more traditional copay-based health plan.

Not only will electing an HSA-based plan generally result in monthly premium savings, the HSA can also be used as a tax shield.

How To Invest HSA Funds

Different HSA custodians have different methods for investing contributed funds. Some offer a list of mutual funds similar to an employer-sponsored 401(k) while others allow for more flexibility in investing.

A good practice is to maintain a balance equal to or greater than the client’s deductible and transfer any funds above that balance to an investment platform, such as TD Ameritrade.

The big advantage of HSAs versus a 401(k) or traditional retirement accounts is that HSAs offer all the benefits of these other accounts—above the line tax deductions and a vehicle for investment growth, but with the added flexibility of using the funds for qualified medical expenses.

An HSA-eligible health plan might not be right for all clients. Advisors can offer a valuable service to clients through providing good advice around this issue and helping those for whom it does make sense to use their HSA as a retirement account.

Learn more about rolling healthcare advisory services into your practice here. 


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