Health savings accounts offer triple tax benefits
Health savings accounts are a vehicle often under-used by financial advisors.
Yet, HSAs provide powerful benefits for clients such as tax deductions on contributions, tax-deferred growth to retirement and tax-free withdrawals if used for medical expenses, according to the Employee Benefit Research Institute.
Moreover, unlike the better-known flexible spending accounts, there are no “use or lose it” issues with HSAs, making them ideal for retirement savings.
Debra Gallant, a certified financial planner and principal of Gallant Financial Planning LLC in Gaithersburg, Md., remembers when HSAs first came onto the market in 2004.
“Once I realized I could get the tax deductions, tax-free growth and stock market returns, I was sold,” she says.
“My clients like them because they have larger contribution limits than [individual retirement accounts] and no income limits the way that Roth IRAs do,” Gallant says. “Most clients love them after I explain the opportunities available.”
There are more hurdles encountered with HSAs than with IRAs, but learning the rules is worth it, she says.
The maximum annual contribution that clients can make this year is $3,300 for self-only coverage, $6,650 for family coverage, plus a $1,000 catch-up contribution for those older than 55.
To qualify, clients must select a high-deductible health insurance plan, and not all insurance companies offer them. Clients can set up their own HSA plans directly with a variety of
banks and other custodians, selecting the one with the lowest fees and/or best investment options.
Advisors can work directly with clients to set up HSAs that the advisor can manage through several custodians instead of using the HSA account provider through the health insurance company.
Carolyn McClanahan, a CFP, expert in health care legislation and a physician and director of financial planning at Life Planning Partners in Jacksonville, Fla., says her typical client is financially frugal and is a “millionaire-next-door type of do-it-yourselfer” with $1 million to $10 million in assets.
“For advisors, HSAs are a great way to save clients money on taxes,” says McClanahan. “Down the road if enough assets are accumulated the HSA can be invested in mutual funds as part of the client’s overall asset allocation. More and more custodians are offering options.”
Gallant sums things up. “The clients who benefit the most from HSAs are those who can afford to self-fund some medical expenses, are in higher tax brackets and have hit the Roth contribution income ceilings. Therefore, they will benefit from the tax-free income generated by investing for 20-40 years.”
Bruce W. Fraser, a New York financial writer, contributes to Financial Planning and On Wall Street magazines.