How to Give Your Kid a 7-Figure HSA

I heard you mention on a previous podcast that you can open an HSA account for Your dependent children 19 to 26 if you have a high deductible health insurance plan. Can you provide more details about this? Do you open it in their name with your HSA company? I assume with post tax dollars. Any details or specifics would be appreciated. Thanks as always for all you Katie.

And your staff do.

Okay, this came up when I was a guest on the podcast a few months ago as Jim and I were answering another question regarding HSAs. He was skeptical at first and understandably so. This sounds like one of those too good to be true hacks. Kind of like the first time you learn about the backdoor Roth ira. After taking some time to do his own research, Jim has now written a blog post that is waiting to be published. It's called Give youe kid a 7 figure HSA. So keep an eye out for that and that's going to be a wonderful.

Resource on this topic going forward to.

Try to give you some help now. So first the kids have to open their HSAs. It doesn't matter where they open the HSA. Fidelity, lively health Equity, Optum Bank, HSA Bank.

Lots of options.

If they have an employer, the employer.

Has an hsa, then that's where they open it up.

HSA contributions are pre tax to the HSA owner, so each kid will get to lower their taxable income by $8,300 in 2024 if they max it out. It's fine if you want to gift them $8,300 of your own post tax dollars in order for them to fund their hsa. They're just the ones that are going to be getting the tax deduction for.

Making the HSA contribution.

Okay, so who qualifies? You mentioned in your question for your dependent children, that is exactly the opposite. Children who cannot be claimed as a dependent qualify. Importantly, it's not whether or not the parent does claim the child as a dependent, it's whether or not the parent can claim the child as a dependent. When I was on the podcast we didn't have time to get into the weeds on this, but I'm here now, so let's do it first in the name of good citation and credit where credit is due. The information I'm providing here and where I learned about this strategy in the.

First place is from an article by.

Jared Winkers on the Michael Kitces blog that is intended to provide quality continuing.

Education for financial planners.

Okay, in order for an adult child to open an HSA they cannot be claimed as a dependent on another person's tax return. This means parents need to be aware of what actually makes a child eligible to be claimed as a dependent. There are five tests that must be met for a child to be considered a qualifying child for parents to claim them as a dependent. Those tests are described in IRS Publication 501.

If you want to look it up.

They must all be met for a child to be considered a qualifying child. Now, normally when we're talking about dependents, we do hope to pass all five tests so that we can claim the kid and and get a discount on our taxes. In the case of the HSA hack we're discussing here, we're hoping to not pass one or more of these tests so that the kid can open their hsa. The five tests are Relationship, Age, Residency, Support and Filing Status. Listen for and be rooting for which test your kid fails so that you can give them a million dollar test tax free HSA at age 65. Okay. Test one relationship. The child must be the taxpayer's biological or adopted son or daughter, foster child.

Or descendant of any of these. Most kids pass this test right?

Test number 2 Age as of December 31, the child must be younger than 19 or younger than age 24 if they are a full time student. They must also be younger than the taxpayer and the taxpayer's spouse if filing a joint tax return. There is no age limit if the child is permanently disabled.

Totally and permanently disabled.

Residency. Generally, the child must have lived with their parents for more than half of the year.

Note.

Children who are away at college are considered temporarily absent and will still be considered to have lived with their parents.

While away at school.

Test number four Support. The child may not have provided more than half of their own support for.

The year to claim them as a dependent.

That means you the parent must have paid more than 50% of their food, shelter, transportation, education, medical, dental care, et.

Cetera, to claim them.

So if the kid works enough to provide half of their own support, or if grandma or a UTMA or some other source combines for half of their support, they fail the support test. Test 5 filing status the child may not file a joint tax return unless the purpose is to claim a refund.

Of withheld or estimated paid taxes.

So if you have a kid that is in this age range who is married and filing a joint tax return with their spouse, awesome news. They are not a qualifying dependent and they can stay attached to your high deductible health plan and take advantage of this HSA strategy Okay, so to recap, this means that just failing one of these tests will preclude the child from being considered a qualifying child and therefore avoid dependent status for the purposes of HSA eligibility. This could be the age test. Maybe they're age 24 to 26, or the residency test. They don't live with parents for the.

Requisite amount of time, not counting time away at college.

Or maybe they failed a support test at any age or time based on their own financial autonomy. Okay, one last weed. In this fun, if not occasionally confounding, weed garden, a taxpayer's child who is not a qualifying child, which we just talked about, can still be considered a qualifying dependent if they can be considered a qualifying relative. There are two tests that must be met for parents to claim a child as a qualifying relative when they would.

Otherwise not be considered a qualifying child.

First test, the gross income test. The child's gross income must be less than a certain amount for the year. That amount for this year, 2024, is $5,050. If the kid makes less than $5,050, the child can still be claimed as a dependent. Second test, the support test.

Parents must provide more than half of the child's total support during the year.

The determination of whether a child is a qualifying relative is primarily relevant when the child is at least 19 years old and not a full time student. Therefore failing the age test.

Which means they cannot be a qualifying.

Child, but may still be a qualifying relative because they still depend on their parents for more than half of their support and they earn less than $5,050 annually. I know that's confusing. We're doing our best here at WCI to provide clarity. I think Jim's article will help a lot. Your CPA should be able to help you. Your financial advisor should be able to.

Help you if you have one.

If you cannot claim your young adult child as a qualifying dependent or a qualifying relative, good news. You can keep them on your high deductible health plan until their 26th birthday. Have them open their own HSA. Have them make the maximum family contribution each year. This can lead to a seven figure.

HSA balance by the time they're in.

Their mid-60s, even if they never contribute.

Another dollar after they turn 26.

This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.