By: Edward J. Leach, MBA, CFP®
Health Savings Accounts (HSAs) are not only a savvy investment option but also offer numerous benefits, especially for high-net-worth families. An HSA is a tax-advantaged savings account designed for individuals with high-deductible health plans (HDHPs) to help cover out-of-pocket medical expenses. While the utility of HSAs is universal, they hold advantages for high-net-worth families and have steadily grown in popularity since their inception.
Here are the top 3 reasons affluent families should consider funding an HSA.
1. Triple Tax Advantages:
Tax-deductible contributions: Money placed into an HSA can be deducted from your taxable income, which is a nice benefit for those in higher tax brackets. By contributing to an HSA, high-net-worth families can reduce their taxable income, leading to potentially significant tax savings.
Tax-free growth: All earnings, whether through interest or investment gains, are tax-free within an HSA. Over time, this can lead to substantial tax-free growth, especially if funds are invested wisely.
Tax-free withdrawals for medical expenses: HSAs allow for tax-free withdrawals when covering qualified medical expenses. Essentially, if used correctly, all contributions and investment growth in an HSA will never face taxation.
2. No “Use it or Lose It” Policy
Unlike Flexible Spending Accounts (FSAs), HSAs don’t have a “use it or lose it” policy. Unspent funds roll over year after year, allowing account holders to accumulate a significant sum over time, providing high-net-worth families an additional investment vehicle that, if used appropriately, will never be taxed.
3. Long-term Financial Flexibility:
Regardless of wealth, health is unpredictable. While high-net-worth families may not feel the immediate pinch of medical bills, exorbitant healthcare costs in later life or unforeseen health issues can still pose a threat. An HSA acts as a shield against such unpredictable medical costs. By having a dedicated, tax-free pool of funds for healthcare, families can ensure that they won’t have to divert funds from other investments when faced with sudden health expenses.
At age 65, the restrictions on HSA funds ease up. While typically meant for medical expenses, after this age, HSA funds can be withdrawn for any purpose. While non-medical withdrawals will be subject to tax, there's no penalty. This essentially means the HSA can double up as a supplementary retirement account. It adds another layer to their financial portfolio for high-net-worth families, providing added liquidity and flexibility in their golden years.
Health Savings Accounts are a powerful financial tool with a plethora of benefits for high-net-worth families. Whether it’s the triple tax advantage, the potential for investment growth, or the versatility in its application towards retirement, HSAs should not be overlooked in the financial portfolios of the affluent.
Like all financial decisions, families should consult with their financial advisor or tax professional to ensure they're maximizing the benefits of their HSA and aligning it with their broader financial goals.
Here are the funding limits for Health Savings Accounts in 2023 and 2024.
In 2023, the HSA contribution limits are:
$3,850 for individuals
$7,750 for families
If you are age 55 and older, you are allowed to make additional catch-up contributions of an additional $1,000.
In 2024, the HAS contribution limits are going up to:
$4,150 for individuals
$8,300 for families
If you are age 55 and older, the catch-up contributions remain unchanged at $1,000.
Ed Leach, CFP®, MBA is a Partner and Wealth Advisor at HIGHLAND Financial Advisors, LLC in Wayne, NJ, and works directly with clients advising them on their financial planning and investments. Ed’s work focuses on the unique needs of business owners, helping them extract value from their businesses while creating efficiencies in their business and personal financial plans. He is, also, a member of NAPFA, which is dedicated to serving fee-only advisors.