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.