Health Savings have grown in popularity in recent years largely because of its flexibility on how we can take money out of the plan tax free and without a penalty. When doing a financial plan on a client, if we notice an ability to choose the High Deductible option as one of the options for health care choices when determining benefits, we often recommend considering this option if the client doesn’t really use their health plan for anything other than annual checkups or routine exams. If the client has a 401(k) and is contributing the max to their plan and is looking for more deductions, contributing to their Health Savings is another way to put more money away tax deductibility. Even if they weren’t looking for more deductions. If they have the ability to contribute to the HSA, consider reducing the 401(k) especially if you're contributing more than the company is matching the HSA has a lot of ways to get the money out tax free before retiring. I can wright more if you want more specifically on this subject. I just wanted to get a few thoughts to you because I wasn’t sure about your deadline for the story. Mark A. Badami, CFP
Although typically sponsored by an employer, HSAs are individually owned and remain with you, regardless of employment changes. That flexibility affords the owner to take full advantage of an HSA's utility. Lower cost High Deductible Health Plans (HDHP) allow for one to open an HSA and with maximum contribution allows for pre-tax income to be used as an offset to the higher deductible. In addition, Co-pays and OTC health products are all HSA eligible. HSAs can be used to pay for many medical expenses approved by the Internal Revenue Service. This includes qualified health insurance premiums. COBRA, Medicare, and long-term-care insurance may be HSA eligible. And in addition to portability, there is no time constraint on when HSA funds can be used, offering flexibility in managing health expenses. And unlike FSAs, if you do contribute the maximum and don't use it all in that year, the remaining funds can be rolled over to the following year.
When I'm advising clients to put money into their HSA, I like to call it the "unicorn" of the financial world. Here's why: 1. They keep access to the funds forever for medical purposes. 2. The funds never "expire" like they would with a FSA or other employer plans. 3. It has a triple tax benefit: tax savings on the way in, tax free growth, and tax free spending (as long as the expenses is health related.) 4. If they let the money stay invested for a long time, it will become a significant bucket of tax-free money down the road for their older years. In fact, I usually prioritize maxing out the HSA even before their Roth IRAs or workplace retirement plan, once they are at least getting their company match. It means more money going into accounts that we don't directly oversee or charge our management fee on, instead of their retirement accounts with us. This aligns with our fiduciary promise to always do what is in our clients' best interest, even when it means we lose some revenue. More than that, it's just smart planning and helps our clients take full advantage of an often overlooked tax haven that is available to most Americans.
I balance the need for flexibility and the benefits of HSAs by: 1. Assessing my clients' health care needs and preferences. I ask them about their current and expected medical expenses, their risk tolerance, and their savings goals. I explain to them how HSAs work, what are the eligibility requirements, and what are the advantages and disadvantages of having an HAS. 2. Comparing different health insurance options. I help them compare the costs and benefits of different health plans, including HDHPs and non-HDHPs. I show them how much they can save on premiums, deductibles, and taxes by choosing an HDHP with an HSA. I also warn them about the potential drawbacks of having a high deductible, such as paying more out-of-pocket before the insurance kicks in. 3. Advising them on how to use and manage their HSAs. I guide them on how to contribute, invest, and withdraw from their HSAs. I recommend them to contribute as much as they can, up to the annual limits, and to invest the funds wisely to maximize their growth potential. I also advise them to use their HSAs for qualified medical expenses only, and to avoid withdrawing money for non-qualified expenses before age 65, as they will have to pay income tax and a 20% penalty.