According to RBC Wealth Management, people need to start looking at their health savings accounts in a different light. These aren’t just employee benefits, the firm says, but something that can be considered part of a person’s overall wealth planning.
That even means in some cases that the money inside an HSA should be allowed to grow tax-free and that patients should instead be paying for some of their medical expenses out of pocket, the firm said.
But thinking this way requires more education among both employers and employees, said Chad Goerner, a senior vice president at RBC who works as a financial advisor, corporate retirement director and institutional consultant.
“One of the challenges advisors face,” Goerner said in an interview, “is getting employers, who provide the plans, and employees, who enroll in them, to use the assets in [an] HSA as a tool that can be used for medical expenses, but also as a financial resource that can be used in retirement for any expenses.”
“Employees,” he added, “tend to think about their HSAs during the annual enrollment period or when they start work at a new company and then forget about them. Advisors need to help them build their HSAs into their wealth planning and retirement planning.”
These vehicles allow money to be put aside tax free, just as 401(k) accounts do, he said. But while 401(k)s are naturally thought of as retirement tools, “unfortunately, HSAs have been decoupled from wealth planning because they are thought of only as a health benefit. … Education for the employers and employees is the answer.”
The money in an HSA can be invested so that it grows tax free. But even though there was approximately $98 billion in health savings accounts at the end of June, according to Devenir, an HSA investment manager, only about $31 billion of that is invested, and the amount is actually decreasing because of the market volatility, Devenir said. Advisors need to help employees see the advantage of investing more of these funds, Goerner advised.
HSAs offer a triple tax benefit: Money can be put aside pre-tax, it grows tax-free if invested, and patients can withdraw the money for medical expenses without paying taxes.
Those people planning for retirement drastically underestimate the cost of medical care, as well as other expenses, and HSAs can help pay for those things, Goerner said. According to a study, “Taking Control of Health Care in Retirement” conducted by RBC, healthcare is expected to cost $625,000 for a 65-year-old couple retiring in 2021.
“While many individuals use HSAs to fund their current year medical expenses, the real value comes as an investment vehicle for the future,” the study said. “Unlike flexible spending accounts, HSAs permit owners to carry balances across calendar years and invest the assets. By paying for current healthcare expenses out-of-pocket instead of paying from the HSA, investors are able to invest and grow balances, building significant resources for the future. By consistently contributing the maximum annual amount, and investing the balance for future healthcare costs, one can accumulate a nice tax-free reserve to fund future healthcare costs.”