Health savings accounts (HSAs) offer a good retirement-savings tool for wealthy clients. Yet most owners of HSAs don’t take full advantage of the accounts, according to advisors.
“An HSA is a great retirement tool, especially for individuals who have the ability to pay medical expenses from funds in non-qualified accounts,” said Isaac Bradley, director of financial planning at Homrich Berg in Atlanta, adding that distributions not used for qualified medical expenses are taxed as ordinary income “and there’s an additional 20% tax on such distributions prior to the owner reaching age 65,” among other conditions.
When the owner reaches 65, an HSA is treated similarly to a traditional IRA, but with no required minimum distributions. HSA contributions are excluded from taxable income, he added, and there’s no time limit on spending the money in an HSA.
“An HSA is primarily a tax-advantaged way to pay for healthcare. But for some it can also be seen as a tax-advantaged investment in that the proceeds can ultimately be used for non-qualified medical expenses,” said Steve Parrish, co-director of The American College of Financial Services Center for Retirement Income.
“HSAs are a hot topic these days,” said Nicholas Ockenga, financial planner with Sentinel Group in Wakefield, Mass. “Anyone can take advantage [but] wealthy clients just end up being able to take advantage of them more because they can afford to.”
The popularity of low-premium HDHPs with young adults, who don’t spend as much on health care as older adults do, make HSAs “a great way to jumpstart preparation for future inflated health care costs,” Ockenga added.
Savings limits on HSAs recently received a big inflation-fueled bump from the federal government. For 2024, the annual limit for an individual with self-only coverage under a high deductible health plan (HDHP) will be $4,150, up from $3,850 for this year. The annual limitation on deductions for an individual with family coverage under an HDHP is $8,300, up from $7,750 in 2023.
“The contributions are pre-tax, the growth in the account is not taxed and the distributions for qualifying medical expenses are also not taxed,” said Thomas Pontius, financial planner at Kayne Anderson Rudnick in Los Angeles. “Because HSAs can be invested in stocks, mutual funds, ETFs, and bonds, there can be significant growth potential over time.”
According to Fidelity, Al Meadows, senior wealth advisor at Gratus Capital in Atlanta, said, last year the average 65-year-old retired couple would need some $315,000 to pay health care expenses in retirement.
“We typically see [new clients’] HSAs idling in cash,” said Mallon FitzPatrick, managing director and principal at Robertson Stephens Wealth Management in New York.
HSAs help with inflation. “Contributing $7,500 today will allow the taxpayer to deduct this amount from their taxable income,” FitzPatrick said. “Assuming the $7,500 is invested and compounds tax-free at an average of 8% annually, the initial contribution will grow to approximately $75,000 after 30 years. Historically, health care costs have risen by 5.5% a year, and a $7,500 procedure today may cost $37,000 in 30 years.”
Families with children younger than 26 who aren’t claimed as dependents and who are enrolled in the parent’s HDHP can open an HSA separately and contribute the family maximum, as can the parents, FitzPatrick said, a tactic known as “supercharging” an HSA. The parents can also gift funds to the child’s account using the annual gift exclusion to avoid taxes.
“An HSA is the only (to my knowledge) triple-tax advantaged vehicle,” said Brian James, managing partner and director of investments at Ullmann Wealth Partners, Jacksonville Beach, Fla., though “you also can’t contribute if you’re in Medicare, but you can still use the account. We do recommend that any clients utilize an HSA if they meet the qualifications.”
An often-missed opportunity occurs when a client who’s working hits 65. “Instead of following the standard advice of filing for Medicare Part A, the working client could delay signing up for Medicare, continue to contribute to their HSA and build tax-deferred savings to use when finally retiring,” Parrish said.
