By Cheryl Winokur Munk, Nov. 23, 2021 11:32 am ET
With open enrollment for workplace benefits in full swing for many clients, some financial advisors are encouraging the use of health savings accounts, or HSAs, as part of an overall financial plan.
HSAs were created in 2003, but they aren’t as widely understood or embraced as 401(k) plans or IRAs. That’s where advisors are getting involved—offering guidance on the ins and outs of these tax-advantaged accounts and even helping clients pick the investments, in some cases.
Getting down to basics. Contributions to an HSA account reduce your taxable income on federal returns, and most states offer the same tax advantages. Meanwhile, investment earnings in an account grow tax free. Additionally, there’s no federal income tax on withdrawals when they’re used to pay for qualified medical expenses, which can include prescription drugs, doctor’s office copays, and, thanks to the Cares Act, even menstrual care products, over-the-counter products, and medications without a prescription. This triple-tax advantage makes it an ideal account for those who qualify.
It’s especially advantageous if clients can afford to pay medical expenses with after-tax money and leave the money in the HSA to grow tax-free, says David Mullins, founder and owner of David Mullins Wealth Management Group in Richlands, Va. He estimates that about seven in 10 clients aren’t familiar with the benefits an HSA offers.
Of course, HSAs aren’t for everyone. You have to have an HSA-eligible, high-deductible health plan in order to contribute. There are also yearly contribution limits. Next year, an individual can contribute $3,650 and a family $7,300, a modest increase from this year. People age 55 or older can make an additional $1,000 annual catch-up contribution through age 65 or until they enroll in Medicare.