Should I Spend My HSA On My Kid’s Braces?

Ah, the Health Savings Account (HSA)… with its quick rise to fame, the HSA has gained popularity as a company benefit. The HSA is loved far and wide by financial advisors as a flexible and tax-efficient tool to cover medical expenses in retirement. However, it can be tempting to utilize the funds before retirement – especially when it comes to covering larger healthcare needs like paying for your kid’s braces. I mean, the money is just sitting there, right? But we’re not here to tempt you. We’re here to explore the hidden costs and considerations you should be aware of before dipping into your HSA funds to cover orthodontic treatments.

Here are four reasons why using your HSA to pay for braces might not be the best financial decision:

1. Long-Term Savings Drain

We briefly touched on the popularity of the HSA, but let’s dive into exactly what makes an HSA so unique and desirable. Firstly, funds contributed to an HSA are pre-tax dollars. Secondly, those funds can be invested and grow tax-free. Lastly, you’re able to make tax-free withdrawals for eligible medial expenses. These three things are what make an HSA a tax-advantaged account.

The key benefit of HSA’s lies in their ability to accumulate tax-advantage funds over time for future medical expenses. With the rising costs of long-term care, your HSA may play an important role in funding those future medical expenses. Fidelity estimates, “a single person age 65 in 2023 may need approximately $157,500 saved (after tax) to cover health care expenses in retirement. An average retired couple age 65 in 2023 may need approximately $315,000 saved[1].”

2. Limited Contribution Room

HSA’s come with annual contribution limits. For the 2023 calendar year, the HSA contribution limits are $3,850 for an individual and $7,750 for a family. By using a significant portion of your HSA funds on braces, you lose out on saving for other important medical expenses in future years.

3. Lost Investment Growth

The money in your HSA can be invested in a diversified investment portfolio to grow tax-free over time. By withdrawing a substantial sum for orthodontic treatment, you miss out on the opportunity for that money to compound and grow significantly over the years.

For example: GoodRx Health estimates traditional metal braces, which are typically the cheapest option, average between $3,000 and $7,000.[2] With the HSA contribution limits stated above, you will likely spend most, if not all, of that year’s contribution on one expense. Essentially losing out on one of the primary advantages of this account: tax-free investment growth.

4. Insurance Coverage and Other Discounts

Before turning to your HSA, take time to explore other options for covering the cost of braces. Check to see if your dental insurance plans offer coverage for orthodontic treatment, and if your orthodontist offers a discount for paying cash up front. It’s advisable to consider these alternatives before depleting your HSA funds.

While HSA’s can be a valuable tool for managing healthcare expenses, using them to pay for your kid’s braces may not be the best choice. We recommend paying for orthodontic costs out-of-pocket and leaving the HSA to accumulate tax-free growth for medical expenses during retirement. If you have any questions about how to optimize your HSA as part of your financial plan, contact a Coldstream Wealth Manager today.

[1] https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs

[2] https://www.goodrx.com/conditions/dental-care/how-much-do-braces-cost