Early contributions will benefit from compounding growth, and there are no capital gains taxes applied to returns.
That’s the triple tax advantage—contributions can be made tax-free, the funds grow tax-free, and the money can also be spent on medical needs without being subject to taxes.
If tax savings are really valuable to your clients, it may make sense for them to sign up for an HSA-eligible health plan, even if the client would otherwise be inclined to choose a more traditional copay-based health plan.
Not only will electing an HSA-based plan generally result in monthly premium savings, the HSA can also be used as a tax shield.
How To Invest HSA Funds
Different HSA custodians have different methods for investing contributed funds. Some offer a list of mutual funds similar to an employer-sponsored 401(k) while others allow for more flexibility in investing.
A good practice is to maintain a balance equal to or greater than the client’s deductible and transfer any funds above that balance to an investment platform, such as TD Ameritrade.
The big advantage of HSAs versus a 401(k) or traditional retirement accounts is that HSAs offer all the benefits of these other accounts—above the line tax deductions and a vehicle for investment growth, but with the added flexibility of using the funds for qualified medical expenses.
An HSA-eligible health plan might not be right for all clients. Advisors can offer a valuable service to clients through providing good advice around this issue and helping those for whom it does make sense to use their HSA as a retirement account.
Ryan McCostlin leads efforts to help individuals and families with health care through partnerships with financial advisors and health-care providers at benefits advisory firm Bernard Health.