Health Savings Accounts are increasingly popular and offer an excellent opportunity for brokers to provide value to their clients. To take advantage of this opportunity, brokers must start with educating their clients on when using an HSA makes sense.
They’re not necessarily easy to understand — the IRS has issued lengthy guidelines on them — but they’re the most tax-preferred way to save in the United States, writes Katy Votava for investmentnews.com. “HSAs provide triple benefits, as funds are contributed pre-tax, grow tax-free and are distributed with no tax due as long as the money is used for health and medical expenses,” Votava writes.
Here are three important points brokers will want to share about HSAs.
1. They can only be used in certain situations.
HSAs are used with high-deductible health insurance. “In order to qualify as high-deductible health insurance, a single taxpayer must have a minimum deductible of $1,300, while family coverage requires a minimum deductible of $2,600,” writes Tony Nitti for forbes.com.
This makes HSAs an excellent vehicle for controlling rising health-insurance premiums and limits on physician choice, a Wall Street Journal opinion piece by Scott Atlas and John Cogan.
2. Clients can use them as an investment vehicle for post-retirement health expenses.
“Since people can use HSAs as a savings vehicle for health care expenses in retirement,” writes Marlene Satter for benefitspro.com, “some people are finding it more advantageous from a tax perspective than saving in a 401(k) plan or other retirement savings plan.”
Individuals own HSAs. Balances in these accounts accumulate throughout the years and can be passed to beneficiaries, Votava writes. “The account holder makes the maximum annual contribution to the HSA and keeps the funds in the account rather withdrawing money on a routine basis for health care expenses,” she writes. “As people accumulate larger balances in their accounts, financial institutions are responding by providing more investment opportunities, such as mutual funds, on HSA platforms.”
An important caveat: those who want to contribute contributing to an HSA should not sign up for any part of Medicare, she writes.
3. They’re a great option but may not outshine others.
“Account holders may have to judge whether they’re leaving employer matching funds uncollected by switching their savings over to an HSA from a 401(k),” Satter writes. And in order to truly maximize one’s investment in an HSA for post-retirement expenses, their owners will need to pay for medical expenses accrued before retirement on an after-tax basis, she writes.
In addition, HSAs can’t be used to pay for every kind of medical expense, Nitti writes. “Generally, you cannot pay your health insurance premiums via your HSA. In addition, things like nonprescription drugs, weight-loss programs and gym or health care dues cannot be paid for out of your HSA on a tax-free basis,” he writes. “As a result, if you withdraw money for these purposes, not only will the distributions be subject to income tax, but a 20 percent penalty tax, as well.”