Help Clients Maximize their Saving Strategy with an HSA
By Lisa Walker, CISP, CHSP
With multiple tax-advantaged savings options available, your clients may often wonder where to defer their money when saving for the future. Sure, there’s the 401(k) plan—or another type of employer-sponsored retirement plan—and the IRA, but they shouldn’t forget about the health savings account (HSA). For clients who have access to all of those—perhaps with limited resources to invest—it may be necessary to prioritize where they save to ensure that they get the most from their dollars.
A common, historically recommended strategy is to first defer money to a 401(k) plan (or other employer plan with a matching contribution) up to at least the amount required to receive the full employer match. After all, not deferring enough to receive the match is like throwing away free money. Plus, saving with an employer plan—no matter how much—can be an easy step for your clients because the money is contributed through payroll—they don’t have to think about it or feel like they’re missing it. And because there are restrictions on accessing those dollars, clients are more likely to leave the money in the retirement account and let it accumulate.
But a similar employer match scenario is becoming more common: employers that offer HSA-compatible high deductible health plans and make contributions directly to their employees’ HSAs through payroll deduction. This “employer match” feature, when combined with employees contributing on their own, makes the HSA as strong of a savings vehicle as the 401(k) plan, but with more flexibility in accessing the assets. And your organization can play a vital role by educating employers and providing them with the tools to educate their employees about the HSA and its benefits (e.g., using flyers or brochures to explain HSAs and ensuring a user-friendly website to find HSA information).
Educating your clients is key because those who are eligible to contribute to an HSA will enjoy several tax advantages—now and in the future—that they may not be aware of. For example, let your clients know that the HSA’s tax advantages start with deductible contributions. This includes catch-up contributions, an option that allows clients age 55 and older to put more than the annual limit into their HSAs each year. And, if made through payroll deduction, HSA contributions reduce your client’s federal income tax liability. Also let clients know that HSA contributions can generate tax-deferred interest and—if used to pay qualified medical expenses—can be distributed tax free.
Beyond the tax benefits, there are other advantages to saving with an HSA. One is not having to liquidate the account at a certain age as with a retirement plan or Traditional IRA. Many of your clients who are in a good position financially may want to leave their money in tax-advantaged savings accounts as long as possible. But when they do want or need to access their HSA, there are no restrictions—the assets are always accessible.
What’s more, HSA assets do not have to be used by a certain time. Any unused assets can stay in the account year after year and can even be invested—a concept often overlooked, as most think of the HSA only as a “spending account” used to pay current medical bills. In fact, waiting to take HSA distributions can help minimize taxation later, such as during retirement. Regardless of how or when it’s used, the HSA is taking the lead as a powerful savings tool.
If your clients aren’t eligible for an HSA or if they have money left to save after contributing what they can to their HSAs, they may want to consider contributing to a Traditional or Roth IRA. Each one has its own tax benefits and savings advantages. Then, if there’s still money to set aside, they may want to go back to their 401(k) or employer plan to top off their savings or they may want to put money toward a retail or education savings account.
Choosing how and where to save for the future can be a difficult decision for your clients if all the options are available to them. But you can help them maximize saving, especially when an HSA is part of their financial portfolio.
