Here’s a head-swimmer for clients, which may lead their advisors to the edge of vertigo, too: the average US senior can look forward to paying just shy of $370,000 for healthcare over the course of their retirement.
The ways and means of covering these expenses are many and this figure should provide a good stimulant for productive discussions.
Health Savings Accounts are a particularly effective tool for customers keen to get a leg up on meeting these inevitable costs. HSAs are a feature of high-deductible healthcare plans (HDHP) and only clients who can access these insurance policies can reap the benefits.
The pluses are considerable: funds placed in HSAs up to the annual maximum are subtracted from their taxable income. When the funds are taken from the accounts to pay doctor bills and other qualified expenses, there’s no tax penalty. HSA funds can cover the deductible or be used for other out-of-pocket medical costs, including copay or coinsurance contributions.
HSAs have an obvious appeal for clients insured under HDHPs, but many positive features are missed, which may sway the decision to invest or not. During consultations on healthcare and retirement planning, we think they bear explaining to your customers.
It’s important to remember that while a person may be healthy when they sign up for an HDHP, that condition can change dramatically, particularly in old age. In any case, useful benefits can accrue from making HSAs part of a retirement planning strategy, even if the client later switches to a different form of health insurance.
If a client wants to discuss retirement planning, spotlight the advantages of HSAs. For example, once holders reach age 65, they can use HSA money for any kind of expenses they wish. The tax advantage only accrues when the funds are spent on medical expenses, while money spent for other uses will be taxed as a non-qualified withdrawal. It is therefore most efficient to use HSA savings for healthcare costs, but the flexibility of these accounts can be a helpful feature for seniors in retirement.
Clients sometimes worry what happens if they lose their eligibility to participate in an HDHP, or simply want another form of coverage. The good news is that HSA counts never expire or face cancellation: the funds are available for qualified expenses as long as the account holder lives. Even if an employer changes to a different provider, offers a different form of life insurance or the client simply leaves to take another job, the HSA remains in place and can be used anytime in their life to fund healthcare costs.
The mechanics of funding an HSA are simple: the employer deducts the agreed sum from remuneration before taxes are assessed and contributes it into the account for the employee. A nice feature of HSAs is that further contributions can easily be made by third parties without complications. Parents commonly contribute to children’s HSAs, and indeed, older children do as much for parents who haven’t yet reached retirement age. Importantly, third-party contributions to HSAs are exempt from gift tax limits. The annual contribution limits for couples and individuals still apply, no matter who is making the deposit.
HSAs earn the standard savings rate, allowing holders to enjoy tax-free growth. Clients who prefer to use HSA funds more aggressively in pursuit of rather less paltry returns can do just that: HSA funds can be invested even if the account holder no longer holds an HDHP. State rules dictate whether HSA fund investments are tax free or not, and not all HSA providers allow outside investment. Fortunately, most of them do, adding another element of versatility to the retirement planning virtues of HSAs.
For more information, please read:
5 Things to Tell Your Clients About HSAs and Retirement Savings | ThinkAdvisor