As workers across the country make their employee benefits selection during open enrollment over the next month or two, financial advisors say there’s an opportunity to educate young, healthy clients about the advantages high-deductible health plans. In addition to improved cash flow because of lower premiums, such plans also give participants access to Health Savings Accounts (HSAs), one of the most underused retirement vehicles, especially for young investors.
An HSA can be a very important part of developing a well-rounded financial plan but you have to be in a high-deductible health plan to be able to contribute to it.
HSA account holders under 30 are the least likely to contribute anything to their HSAs. That means that they’re missing out on the triple-tax advantage of such accounts, which have no taxes on contributions, growth, or qualified withdrawals.
Rising awareness of benefits
HSAs are expected to become more popular as awareness of their benefits increases and more people take advantage of high-deductible healthcare plans. In 2024, 38.8 million people were enrolled in HSA-eligible plans, a 21% increase compared with 2019, according to the health insurance trade group America’s Health Insurance Plans.
People who have entered the workforce over the last five or so years are poised to capitalize on HSAs because the knowledge around them has improved tremendously. More people utilizing them, and more people understanding that they can invest dollars within their HSA.
As life spans increase and healthcare costs continue to rise, financial advisors are encouraging their younger clients to stop thinking of HSAs as a spending account for current costs and start viewing them as a powerful long-term retirement savings tool. For younger clients, money invested in an HSA could potentially benefit from decades of compounded growth.
Future flexibility
HSAs have a level of flexibility that rivals IRAs and 401(k)s. After age 65, account owners can use the funds in an HSA for any purpose, penalty-free, making them essentially a retirement account in disguise.
For many clients, that may be unnecessary, given the broad definition of “qualified medical expenses.” Qualified expenses can include not only the cost of doctor’s visits and prescriptions but also home renovations for medical purposes (such as installing ramps or widening doors). Some Medicare and long-term care insurance premiums and nursing help are also considered qualified expenses.
Still, most HSA account holders are using them for current medical expenses, more than half of HSAs had a distribution in 2023, averaging $1,801, according to the Employee Benefit Research Institute.
To truly optimize the value of HSAs, some advisors urge clients not to use them for current medical expenses, although an account can be a source of emergency funds in the case of a major event. Rather, they’re better off paying out of pocket for regular medical expenses like prescriptions and doctor’s visits and letting the account grow over time.
Healthcare is a larger and larger line item in many people’s lives as far as your total dollars spent. Addressing that early on, when you can make those dollars work for a longer time can have extreme value in a person’s life, especially when they have few health expenses using those HSA dollars.
For those younger clients who may not see healthcare costs, or retirement, as a pressing concern, funding HSA contributions can be seen as similiar to funding a 401(k). Start small, even with just $50 or $100 a month, and increase over time.
See the value
It’s really interesting and helpful for the client to see how, in the hypothetical year 2055, they might have a $10,000 or $15,000 medical expense that would be coming out of pocket, but if you now have an HSA worth $50,000, and it has grown tax-deferred and tax-free this whole time, you can use that.
As account balances increase an advisor may encourages clients to make sure that they’re investing the funds. That’s particularly important because most HSAs default to a cash investment. Investing those funds are a key part of the strategy.
We can help you determine if an HSA is right for you. Schedule a complimentary first meeting with MRA Advisory Group today and let’s get to work!
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