Health savings accounts (HSAs) offer a good retirement-savings tool for wealthy clients. Yet most owners of HSAs don’t take full advantage of them, according to advisors.
For one thing, HSAs help with inflation. “Contributing $7,500 today will allow the taxpayer to deduct this amount from their taxable income,” says Mallon FitzPatrick, managing director and principal at Robertson Stephens Wealth Management in New York. “Assuming the $7,500 is invested and compounds tax-free at an average of 8% annually, the initial contribution will grow to approximately $75,000 after 30 years. Historically, healthcare costs have risen by 5.5% a year, and a $7,500 procedure today may cost $37,000 in 30 years.”
When an account owner reaches 65, an HSA is treated the same as a traditional IRA, but with no required minimum distributions. But there’s an additional advantage of using these accounts when you’re over 65: You can use the distributions for things other than medical expenses, and those distributions will only be taxed as ordinary income. Before account holders turn 65, they’d have to pay an additional 20% tax on those payouts, says Isaac Bradley, director of financial planning at Homrich Berg in Atlanta.
“HSAs are a hot topic these days,” says Nicholas Ockenga, a financial planner with Sentinel Group in Wakefield, Mass. “Anyone can take advantage, [but] wealthy clients just end up being able to take advantage of them more because they can afford to.”
Savings limits on HSAs recently received a big inflation-fueled bump from the federal government. For 2024, the annual limit for an individual with self-only coverage under a high-deductible health plan will be $4,150, up from $3,850 for this year. The annual limitation on deductions for an individual with family coverage under a high-deductible plan is $8,300, up from $7,750 in 2023.
“The contributions are pretax, the growth in the account is not taxed and the distributions for qualifying medical expenses are also not taxed,” says Thomas Pontius, financial planner at Kayne Anderson Rudnick in Los Angeles. “Because HSAs can be invested in stocks, mutual funds, ETFs and bonds, there can be significant growth potential over time.”
According to a Fidelity estimate, the average 65-year-old retired couple would need some $315,000 to pay healthcare expenses in retirement in 2023.
Families with children younger than 26 who aren’t claimed as dependents and who are enrolled in their parents’ high-deductible plan can open an HSA separately and contribute the family maximum, as can the parents, says FitzPatrick, a tactic known as “supercharging” an HSA. The parents can also gift funds to the child’s account using the annual gift exclusion to avoid taxes.
“An HSA is the only (to my knowledge) triple-tax advantaged vehicle,” says Brian James, managing partner and director of investments at Ullmann Wealth Partners in Jacksonville Beach, Fla. You can’t contribute if you’re in Medicare, he says, “but you can still use the account. We do recommend that any clients utilize an HSA if they meet the qualifications.”
An often-missed opportunity occurs when a client who’s working hits 65. “Instead of following the standard advice of filing for Medicare Part A, the working client could delay signing up for Medicare, continue to contribute to their HSA and build tax-deferred savings to use when finally retiring,” says Steve Parrish, co-director of the Center for Retirement Income at the American College of Financial Services.
For younger adults, HSAs can be “a great way to jump-start preparation for future inflated healthcare costs,” says Ockenga, who adds that these accounts are more appropriate for this younger cohort, who prefer low-premium high-deductible health plans where HSAs come in handy.