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Though still well above levels seen three years ago, the Consumer Price Index (CPI) is declining, indicating inflation is relenting to some degree.
The troubling news is that for decades now, healthcare inflation has known only one path: higher. By some estimates, married couples that are currently 65 years old may need approximately $315,000 in after-tax savings to adequately cover retirement health costs. That’s a house in many parts of the U.S.
One way of looking at that scenario is that advisors should take the time to discuss with clients the benefits of health savings accounts. Not only are HSAs a prime avenue for saving for healthcare in retirement, these accounts come with three clear tax perks. Participants can make tax-free HSA contributions, the investment earnings accrued in the account are not taxed and the same is true when it comes time to pull funds from the HAS to cover a healthcare expense.
Those attributes are increasingly meaningful, particularly as life expectancies and healthcare inflation appear joined at the hip regarding their upward trajectories.
Understanding HSA Benefits, Rules
HSAs are applicable to workers with large health insurance deductibles and they’ve been around just 20 years, which isn’t nearly as old as some of the other products advisors address with clients. That implies some clients likely need some education regarding the utility of HSAs.
“Under IRS rules, you can open and contribute to an HSA only if you are enrolled in a high-deductible health plan. In recent years, more employers have begun to offer high-deductible plans, making them more common, with more than one in five employers that have health benefits now offering this type of plan to their workers,” according to Morgan Stanley. “These health plans tend to have relatively low premiums and higher out-of-pocket expenses, which the HSA may help offset.”
For clients, it’s important that they’re not put off by “high deductible.” That’s territory in which advisors can add value, helping clients realize the benefits of HSAs.
“People often see the high deductible and get scared away, but it’s worth a conversation with your Financial Advisor about the financial benefits that the HSA can offer,” says Dana Erdfarb, Vice President, HR Benefits Planning and Management at Morgan Stanley.
Advisors should also tell clients that for the current tax year, single folks can contribute $3,850 to an HAS while married couples can contribute $7,750.
With HSAs, Clients Need Advisors
In the broader spectrum of financial assets, HSAs aren’t overly complex, but clients that work with advisors before allocating to these accounts are likely to avoid headaches while potentially reaping the full benefits of these products.
For example, many clients may not know that HSAs feature some of the same perks they’ve come to know and love with 401(k)’s.
“That means any investment earnings in your HSA have the potential to grow for decades, effectively creating an extra tax-advantaged retirement fund—in addition to your 401(k) and any IRAs—that you can earmark for health-care expenses later in life,” concludes Morgan Stanley. “Keep in mind, though, that if you switch from a high deductible health plan to another type of health plan, you will not be able to contribute further to the HSA until you are once again covered by a high-deductible health plan. You can, however, still use it to pay for qualified expenses.”