Five Reasons to Let an HSA Build

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As a comprehensive financial advisor, you know how important it is to utilize several different tools and resources for clients. One of these tools is a health savings account (HSA.) An HSA is a tax-advantaged medical savings account that your clients can contribute to and withdraw from tax-free for qualified medical expenses. Funds in an HSA are split into a liquid cash account and an investment account. 

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If your client has a high-deductible health plan, they likely have an HSA. Although an HSA can be used on everyday medical expenses, like over-the-counter medications or primary care appointments, clients don’t have to use their HSA for every medical expense. They can make deposits and let the account build. It’s a great wealth-building strategy for several reasons, which we’ll break down in this blog. 

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1. HSA contributions are pre-taxed (or tax-deductible.)

Interest and investment earnings on HSA contributions can grow tax-free. This of course is a great reason to let an HSA account balance grow for as long as possible. This tactic can be especially helpful for your younger clients who are generally healthy and don’t engage with healthcare often. Rather than using their HSA to pay for the few medical events and expenses they do have, they pay out-of-pocket and allow their HSA to grow. Older clients can also benefit from having their taxable income lowered, and a great way to do that is through HSAs. Each client’s situation is unique, but you likely have at least a few clients who could benefit from having their taxable income lowered. 

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2. HSA contributions can be invested and grow tax-free.

If your client has an HSA, they can grow their funds through interest. In some cases, they can also invest their contributions. What’s even better is that neither interest nor investment is subject to taxes. Just like many other investments, it’s wise to leave it untouched so it can grow as much as possible. Unlike some investments though, (such as a 401k or an IRA) there aren’t any requirements for minimum distribution options. An HSA also stays with your client forever. It doesn’t go away if they leave their employer or even if they change their health plan.

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3. Clients can withdraw money from their HSA at any time after 65.

Yes, you read that right. After clients turn 65, they can withdraw funds for any reason. The only caveat is that they’ll have to pay income taxes on funds withdrawn for non-medical expenses. As a comprehensive financial advisor, this gives you a lot of strategies to discuss with your clients on how and when to use their HSA in retirement. It can still be used on just medical expenses, especially since healthcare costs are the second most expensive item in retirement. But, it’s ultimately up to you and the client on how HSA funds are used after 65.

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4. HSAs can be used for larger medical bills.

Rather than using an HSA for medications and doctor appointments, which are generally smaller bills, clients can let their HSA build so they can rely solely on it should they have a large medical bill in the future. Childbirth, major surgery, and other procedures that can cost thousands of dollars (even with health insurance!) will be less daunting to clients who choose to let their HSA build. Of course, this means they’ll need to pay out-of-pocket for other medical expenses, but it’s much more manageable to spend a few hundred a year on medications and check-ups than thousands on a major procedure.

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Letting an HSA build can also be helpful for plannable procedures — like knee or hip replacement surgery. If your client knows they’ll want a plannable procedure in the future, an easy way to save money for the procedure is to let their HSA balance accumulate.

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5. A large HSA balance can make it easier to retire early.

Growing a large account balance in an HSA can be used towards a client’s “nest egg” for retirement. As we mentioned earlier, healthcare is one of the most expensive items in retirement. Because of increased healthcare costs, it can be difficult for clients to retire when they want without running out of money or having to severely alter their lifestyle. However, if they have an HSA that’s been building for years or even decades, odds are that they’re pretty well set up for healthcare costs in retirement. This can allow clients to retire when they originally planned, and in some cases, they might even be able to retire sooner than they thought.

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To build or not to build?

For many clients, choosing a high-deductible health plan and contributing to an HSA is a great way to build wealth. They can build it for decades to then use in retirement for healthcare costs or other expenses (but non-medical expenses will be taxed), or, they can use it before they turn 65 but leave it mostly untouched so that they have a fund for large medical expenses like surgery or childbirth. You’ll need to look at each client’s unique situation to first determine if a high-deductible health plan is a smart choice for them, and then determine whether it’s better for them to build their HSA or use it on everyday medical expenses. Our opinion though is that if someone has a high-deductible health plan and is generally healthy, letting their HSA account accumulate is a smart choice for their financial future.

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