Tax planning has always been important, but never more so than today. 

That's in part because the Tax Cuts and Jobs Act expires at the end of next year. Depending on the outcome of the upcoming presidential election, rates could revert to pre-2017 levels, resulting in a significantly higher tax bill for virtually all Americans.

However, even if that doesn't happen, there's a massive elephant in the room that very few politicians want to discuss: the nation's ever-rising debt. At some point, policymakers in Washington D.C. will need to confront the government's more-than-$34 trillion problem head-on. Therefore, even if rates don't go up soon, it's logical to conclude that taxes will have to at some point.   

Advisors, of course, have many ways to create tax efficiencies for clients. They range from very sophisticated strategies involving trusts and gifting to simpler approaches like maxing out qualified retirement accounts and utilizing Roth IRA conversions.

Yet, health savings accounts, or HSAs, frequently get lost in this conversation. Most clients likely appreciate the nominal benefit of an HSA—saving for healthcare expenses. What many of them—and even more than a handful of advisors—fail to grasp is just how valuable a tax mitigation tool they can be.

The Nominal Benefit
Contributing to an HSA is one of the most effective ways to ease the burden of navigating medical expenses. In 2022, Americans collectively spent more than $4 trillion on healthcare, an increase of over 4% from the previous year.

Like most other savings accounts, HSAs have annual contribution limits. Those are $4,150 for individuals and $8,300 for families). Further, anyone over 55 can make catch-up contributions, equaling an additional $1,000 per year.  

Hsa As A Retirement Vehicle
While the primary function of HSAs is attractive enough, they also offer a set of tax advantages that make them a unique vehicle for saving for retirement.

• Tax-deductible contributions. Like traditional qualified retirement accounts, annual HSA contributions are tax-deductible.

• Tax-free spending. Suppose an account holder needs to withdraw from their HSA to cover qualified medical expenses, such as copays, doctor visits and prescriptions. In that case, they can do so tax-free and without incurring penalties.

• Tax-deferred growth. Like IRAs, an HSA can include investments and accrue interest. Those gains are not taxed as long as they remain in the account.

Added Benefits  
Based on the triple tax benefit described above, there's a powerful argument for prioritizing HSA contributions over conventionally popular options such as IRAs and 401(k)s. Yet, the benefits can be even more pronounced for older clients flush with liquidity.  

In those instances, it could make sense for them to avoid withdrawing from an HSA to pay healthcare costs and rely on cash reserves instead. This allows the account to grow without interruption. Equally important, if they keep those receipts, clients can simply make qualified withdrawals down the line to reimburse themselves for those charges.

Finally, even if investors are fortunate enough not to have outsized medical bills into retirement, it doesn't mean they won't ultimately benefit from the HSA's long-term growth. In fact, after reaching age 65, investors can withdraw from an HSA account even for non-qualified expenses without penalty and would only have to pay income tax, much like they would when withdrawing from an IRA.

Whatever the vehicle or strategy, advisors must be increasingly vigilant about how potential tax increases might impact their retirement savings. While no investment decision should happen in a vacuum, an HSA's nominal and triple-tax benefits make it an incredibly difficult option to ignore.

Nicole Anderson is a director at Choreo, an independent wealth management firm focused on redefining the RIA's place in the wealth advisory industry.