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HSAs As ‘ Medical IRAs ’: A Great But Neglected Strategy
Using HSAs for long-term compounding can seriously add to clients ’ wealth . So why aren ’ t more advisors recommending the strategy ?
By Steve Garmhausen
ROTH IRAS HAVE CAUGHT ON AS WEAPONS IN Americans ’ wealth-building arsenal : Attracted by their double-tax-free treatment — after-tax contributions grow and are withdrawn tax-free — retirement savers have socked more than $ 1 trillion into them . But the “ medical IRA ” strategy of using triple-tax-free health savings accounts to fund medical expenses in retirement hasn ’ t caught on . Does the financial advice industry bear some of the responsibility ?
“ We ’ d argue that HSAs are probably the most powerful vehicle in the entire tax code , even probably more than the Roth IRA ,” says Michael Henley , the founder and CEO of $ 1.25 billion-asset Brandywine Oak Private Wealth , in Kennett Square , Pa .
The medical IRA strategy involves contributing to a health savings account , preferably maxing out the annual contribution limit , which is currently $ 4,150 . HSAs must be paired with high-deductible health plans , of course . The funds are invested with a multi-decade time horizon , with allocations similar to those in retirement accounts . Before retirement , medical expenses are paid out of pocket , allowing the HSA balance to compound tax-free , and you keep your receipts . When you tap your HSA in retirement , you repay yourself .
As an example , if you invested $ 4,150 a year between ages 30 and 65 , and your balance compounded at 8 % annually , you ’ d have approximately $ 500,000 to spend on everything from Medicare premiums to prescription drugs , tax-free , in retirement .
It seems like a no-brainer , especially if you ’ ve got enough cash flow to cover medical costs while your account balance grows . “ It ’ s a good way for people to sock away money ,” says Ann Zuraw , president of $ 316 million-AUM Zuraw Financial Advisors , in Greensboro , N . C . “ If you can build it up , you really could be ahead of the game .”
MAY 2024 | FINANCIAL ADVISOR MAGAZINE | 53