For example, he said, a client who today begins fully funding a family HSA at age 50, takes advantage of all contribution increases and the $1,000 catch-up starting at age 55 and invests the account at an 8% return will have accumulated $383,000 by age 67. This includes the spouse opening an account in their name at age 55 for their own $1,000 catch-up. (A client who did this in 2004 and invested in the S&P 500 would have had an account that grew to $477,000 by the end of 2021.)

To use the HSA as a wealth accumulation vehicle, the client would cover qualified medical expenses with an emergency fund, letting the HSA funds grow untouched, Stahl said. That’s possible with an HSA because of a look-back allowance. When it’s time to withdraw funds, a client can file claims with receipts going back to the start of the account.

Qualifying expenses include vision care, dental work, hearing aids, prescription vitamins, medically necessary home modifications, Medicare premiums (parts A, B, C and D) and long-term-care insurance premiums. Of course, current expenses count, but so do prior expenses from the beginning of the HSA.

For example, Stahl said with his own twins, who needed their wisdom teeth out, the dentistry bill came to over $5,000.

“As tempting as it was, I didn’t touch the HSA to pay for it. I pulled money out of my emergency fund. I now have a $5,000 receipt sitting in my HSA folder, and I can use that $5,000 tax-free withdrawal at any point from my HSA,” he said.

Aside from wealth accumulation, there are other financial planning opportunities that go along with an HSA account, Stahl said:

  • When the account owner dies, the HSA, like an IRA, can pass to a spouse who can continue to use it. If the beneficiary is a non-spouse (a child, for example), the beneficiary has 12 months to make any overlooked tax-free withdrawals on behalf of the account holder, including Medicare premiums.
  • Long-term-care insurance premiums can be reimbursed out of an HSA up to certain limits: In 2022, someone age 40 or younger could deduct $450; 41 to 50, $850; 51 to 60, $1,690; 61 to 70, $4,510; and 71-plus, $5,640.
  • While regular medical insurance premiums are not considered an eligible expense, there are some exceptions. COBRA premiums, premiums paid while receiving unemployment compensation, and Medicare and other healthcare coverage for clients 65 and older.
  • FSAs and HSAs are compatible if the FSA is limited to vision and/or dental benefits.
  • An HSA for a non-dependent adult child who is still on the family health plan can be opened in the child’s name and funded by the parent.
  • There is a limited opportunity to fund an HSA with an IRA, in that the HSA contribution limits have to be met and this can occur only once in the account holder’s lifetime.
  • Clients who plan on switching to Medicare (or starting social security, which automatically starts Medicare) will have to halt their HSA contributions. However, when they start Medicare they will have a retroactive withdrawal for their Medicare premiums going back six months even though they were covered by an employer’s health plan. So clients should stop making contributions to their HSA six months before going on Medicare in order to take advantage of this lookback.

To maximize both savings and investment potential, when working with a client with a 401(k) with an employer match, advisors should follow a specific order of investment, Stahl said.

“By all means, fund the 401(k) as the top priority. Utilize the match,” he said. “Once you get the match, go ahead and fund the HSA. And then if you have additional discretionary dollars, go back and finish funding the 401(k).”

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