What Advice Do You Have for Balancing Flexibility With the Benefits of Health Savings Accounts?
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What Advice Do You Have for Balancing Flexibility With the Benefits of Health Savings Accounts?
In the intricate dance of financial planning, Certified Financial Planners and Client Advisors weigh in on the dual priorities of flexibility and the advantages of Health Savings Accounts (HSAs). From recommending high-deductible plans selectively to highlighting HSA flexibility and portability, here are the top four expert strategies for advising clients on optimizing their HSAs.
- Recommend High-Deductible Plans Selectively
- Tailor HSA Strategies to Client Needs
- Prioritize HSAs for Long-Term Tax Benefits
- Highlight HSA Flexibility and Portability
Recommend High-Deductible Plans Selectively
Health Savings Accounts have grown in popularity in recent years, largely because of their flexibility in how we can withdraw money from the plan tax-free and without penalty. When doing a financial plan for 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 Account is another way to put more money away with 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) contributions, especially if you're contributing more than the company match. The HSA has many ways to access funds tax-free before retirement.
Tailor HSA Strategies to Client Needs
When advising clients on Health Savings Accounts (HSAs), it's crucial to balance the need for flexibility with the benefits these accounts offer. One effective approach is to assess each client's unique financial situation, health care needs, and risk tolerance to determine the optimal HSA strategy.
For clients who prioritize flexibility, I emphasize the tax advantages and investment potential of HSAs, highlighting their ability to save for future health care expenses while enjoying tax-free growth and withdrawals for qualified medical expenses. This flexibility allows clients to use HSA funds as needed, whether for immediate health care costs or long-term savings goals.
However, it's essential to also educate clients about the importance of maintaining a sufficient cash balance in their HSA to cover unexpected medical expenses and avoid penalties for non-qualified withdrawals. By striking the right balance between flexibility and responsible financial planning, clients can maximize the benefits of HSAs while maintaining financial security and peace of mind.
Prioritize HSAs for Long-Term Tax Benefits
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 an 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 expense 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.
Highlight HSA Flexibility and Portability
Although typically sponsored by an employer, HSAs are individually owned and remain with you, regardless of employment changes. That flexibility affords the owner the opportunity to take full advantage of an HSA's utility. Lower-cost High Deductible Health Plans (HDHPs) allow for one to open an HSA, and with maximum contributions, allow 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, including 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. 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.
