Invest Long-Term Care Funds in HSAs, Brokerages

Individuals planning to self-fund long-term care expenses should consider investing these funds in a Health Savings Account (HSA) or a taxable brokerage account, according to financial planning advice. While a separate account for long-term care funds is not mandatory, it is crucial to inform loved ones about its existence and location. The primary consideration for choosing an investment vehicle is its tax efficiency for out-of-pocket long-term care costs.

A Health Savings Account (HSA) appears to be a logical choice due to its tax-free withdrawals for qualified healthcare expenses, which typically include long-term care services. However, HSAs have limitations that may hinder their effectiveness for this specific purpose. Annual contribution limits, set at $4,400 for single coverage and $8,600 for family plans in 2026, might prevent individuals over age 50 from accumulating a substantial fund before retirement. Furthermore, once an individual is covered by Medicare, they are no longer eligible for high-deductible health plans and cannot make additional HSA contributions. Despite these constraints, investing in an HSA remains beneficial if accessible, though it may not be sufficient to cover significant long-term care needs.

Another reservation regarding HSAs for long-term care is the potential for suboptimal tax benefit utilization. Long-term care costs are tax-deductible only to the extent they exceed 7.5% of a person's adjusted gross income (AGI) in a given year, in addition to other healthcare outlays. This means that if tax-free HSA withdrawals are made in the same year that high medical expense deductions are claimed, the full tax advantages of the HSA might not be realized. Additionally, while unused HSA funds can pass to heirs, the tax benefits cease upon death if the account is inherited by someone other than a spouse, diminishing its value as an estate planning tool for long-term care funds.

For those seeking greater flexibility and potentially higher growth, a taxable brokerage account is a viable alternative. These accounts do not have contribution limits and offer a wide range of investment options, allowing for potentially greater accumulation of funds. While withdrawals from taxable brokerage accounts are subject to capital gains tax, the ability to invest a larger sum and the absence of restrictions related to Medicare eligibility or AGI thresholds can make them attractive. The key is to select investments within the brokerage account that align with the long-term care timeline and risk tolerance, ensuring that the funds are accessible and have grown sufficiently by the time they are needed. Careful planning and consultation with a financial advisor can help determine the most suitable investment strategy for long-term care needs, balancing tax advantages with growth potential and accessibility.