Give Your Kid a 7-Figure HSA

I've mentioned previously on the blog about a cool book I read many years ago called Make Your Kid a Millionaire. It talked about all the ways you could help your kid to be wealthy—such as giving them a low-cost variable annuity as a young child, funding 529s, and matching their earnings into Roth IRAs. The basic idea is that it doesn't take all that much money to become a millionaire if you can allow compound interest to work on it for six decades.

For example, if you put $10,000 into an account and allow it to compound at 10% for 60 years, you end up with

=FV(10%,60,0,-10000) = $3,044,816

You can play with the numbers all you like (lower rate of return, shorter time period, larger contribution), but the point is that long-term compound interest is really powerful—especially when it can be done in a tax-protected account of some type.

We've adopted a lot of these strategies with our kids, but I learned about a new one recently that I thought was worth sharing.

The Adult Child HSA Family Contribution Loophole

I'm not sure Congress really thought through all the rules when it came up with the idea of a Health Savings Account (HSA) and set up the rules for it. That's why you can do things like save receipts for decades and then pull the money out of the account. That's why you can use it as a stealth IRA by investing in it for decades and then pulling it out after age 65 penalty-free and buying a sailboat with it. Due to the way the various HSA rules are written, there is another cool HSA trick you should know about. Here it is:

“If your adult, non-dependent child is only covered by your High Deductible Health Plan, they (or you) can also make a family contribution into THEIR HSA in addition to yours.”

For 2024, that contribution limit is $8,300 (in 2025, it'll be $8,550). If you have a 19-year-old, they can make a contribution that is completely separate from your HSA contribution. You can put $8,300 into your HSA, and each of your adult kids on that family High Deductible Health Plan (HDHP) can make their own $8,300 contribution to their HSAs. Let's say you do this from age 19 to age 25. I don't know future HSA contribution limits, but they'll likely be higher each year as that limit is indexed to inflation. But for simplicity's sake, we'll just assume that $8,300 is contributed each of those seven years, and it is all invested and not spent. What will it add up to by the time the child is 65?

By the time they're 26 and come off your plan, it'll be worth

=FV(10%,7,-8300) = $78,744

Thirty-nine years later, it'll be worth

=FV(10%,39,0,-78744) = $3,239,904

Even if you want to use a lower rate of return or adjust it for inflation somehow (let's use 5%), you still end up with

=FV(5%,7,-8300) = $67,579

=FV(5%,39,0,-67579) = $453,100

It's not a million, but it's probably still more than your kid will ever spend on healthcare in retirement and probably in their whole life.

More information here:

How We Built a 6-Figure HSA (and What We Plan to Do with It)

Beware! An HSA Is Great But . . .

Why Is This Allowed?

In Publication 969 (Health Savings Account and Other Tax-Favored Health Plans), the requirements to contribute to an HSA are outlined:

• You are covered under a High Deductible Health Plan (HDHP) on the first day of the month;
• You have no other health coverage in addition to the HDHP (with certain exceptions);
• You aren’t enrolled in Medicare; and
• You can’t be claimed on someone else’s tax return as a dependent (regardless of whether you actually are claimed or not).

That's it. So, if your kid is not a dependent for tax purposes AND is only covered by an HDHP, they can contribute to an HSA. They do not have to be on their own plan. That is not on the list of requirements.

The amount of the contribution is determined by the type of plan you are on, NOT the number of people in your family. There are family HDHPs, and there are single HDHPs. If it's just a mom and an adult non-dependent child, that's a single HDHP, and the contribution for each of them will be $4,150 in 2024 ($4,275 in 2025). If it's a mom, a dependent kid, and a non-dependent kid, then it's $8,300 for mom and $8,300 for that non-dependent kid for 2024.

Unlike retirement plans (except, I suppose, a spousal IRA) but similar to 529s, anyone can fund the HSA. The parents can supply the $8,300, meaning the non-dependent child doesn't have to come up with it. It's best to fund an HSA through a payroll deduction because that also saves payroll taxes, but it's certainly still worth doing for most even without that deduction.

Why an HSA Is Not as Good for Your Kid as for You

While there are few downsides to having an HSA, it's not as beneficial for most young people to make HSA contributions (or have them made on their behalf) as it is for you.

For example, I'm in the 37% federal income tax bracket. An $8,300 contribution saves me $8,300 * 37% = $3,071 off my federal income taxes and another $386 off my state income taxes. My adult, non-dependent daughter is in the 0% tax bracket. She saves $8,300 * 0% = $0 on her tax bill by making an HSA contribution. Not quite the same thing. Sure, the account will still enjoy tax-protected growth, but my daughter is also in the 0% qualified dividend and long-term capital gains bracket. Heck, her ordinary dividend and short-term capital gains rate is also 0%. Her taxable account is currently perfectly tax-efficient. That's not much of a benefit either, at least for a while until she starts earning more. Withdrawals for healthcare, of course, come out tax-free, but it's possible for the first few years that those could come out of a simple taxable account at 0% too—no different than the HSA. And if she makes a withdrawal for a non-healthcare reason before age 65, there's a 20% penalty. She could actually come out behind with an HSA compared to a taxable account, at least for a while.

This really only makes sense as a long-term play. Eventually in her life, an HSA will be beneficial, but right now it's nowhere near as beneficial for her as it is for me. Even if I make the contribution into her HSA, it's her deduction, not mine. In fact, that contribution counts toward my $18,000 annual gift tax exemption limit ($19,000 in 2025).

What Are the Dependent Rules?

At this point, you're probably wondering whether your adult child is your dependent for tax purposes. Let's examine the IRS rules on that point. The first question is whether the child is a “qualifying child.” They must meet ALL FIVE of these criteria to be a qualifying child.

1. Relationship: The child must be the taxpayer’s biological or adopted son or daughter, foster child, or descendant of any of these people (they may also be a brother, sister, half-sibling, step-sibling, or a descendant of any of these people);
2. Age: As of December 31, the child must be younger than age 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 married and filing jointly) who is claiming the dependent. There is no age limit if they are permanently and totally disabled;
3. Residency: Generally, the child must have lived with their parents for more than half the year (children who are away at college are considered temporarily absent and will still be considered to have lived with their parents while in school);
4. Support: The child may not have provided more than half their own support for the year; and
5. Filing Status: The child may not file a joint return unless the purpose is to claim a refund of withheld or estimated paid taxes.

The easiest way to NOT be a qualifying child is No. 4, providing more than half your own support. However make sure to note a very significant exception: if the child is 19 and NOT a full-time student, it doesn't matter if you're providing more than 50% of their support; they're still not a qualifying child.

It's still possible for your child who is not a qualifying child to be a dependent as a “qualifying relative.” The rules for that are two-fold and BOTH must be met:

1. Gross Income Test: The child’s gross income must be less than a certain amount ($5,050 for 2024) for the year.
2. Support Test: Parents must provide more than half of the child’s total support during the year.

That's not too hard to get around. Frankly, for many WCIers including us, there's no benefit to having a dependent adult child. The child tax credit starts phasing out at a Modified Adjusted Gross Income (MAGI) of $200,000 ($400,000 Married Filing Jointly), and it doesn't apply to adults anyway; they have to be under 17. So, get them off the payroll ASAP. It might save them some tax money if no one else can claim them, and it will make them eligible for HSA contributions.

More information here:

When to Give Inheritance Money to Your Kid?

How I Teach My Kids About Money

Will We Be Doing This?

WCIers know that I love tax-protected accounts, especially those that provide significant asset protection (unfortunately HSAs are not protected in Utah bankruptcies). Our kids all have 529s, Roth IRAs, and UTMAs. Should we also try to give them a substantial HSA? There are three factors that keep me from wanting to do this.

The first is that there is zero short-term benefit. The loss of that upfront tax deduction is particularly significant. Of course, the alternative is to just give them the money via their UTMA/taxable account or invest it in our own taxable account, neither of which provides an upfront tax deduction either.

The second is the fear of ruining them with “Economic Outpatient Care,” a term made famous in the classic The Millionaire Next Door where giving adult kids money results in them being less financially successful. Wealthy parents have a continual dilemma of wanting to give “with warm hands” when it will make the most difference in their kids' lives and not wanting to ruin them with Economic Outpatient Care. We have mostly resolved this dilemma with a compromise by giving them a relatively small part of their inheritance in their 20s (a 20s fund composed of a Roth IRA, UTMA, and 529) and withholding the lion's share of their inheritance to ages 40, 50, and 60 (1/3 each). The theory is that they'll be on their own for two decades. But are they really on their own if we keep giving them $8,300 a year and including them on family vacations and such? Not really. So far so good as we have kids who are pretty savvy with money. But we still worry about it.

The last factor to consider is one of fairness. If we're still matching money into Roth IRAs for the teenagers, is it really fair not to do that for the 20-year-old? And if we're still giving the younger kids $18,000 or $36,000 a year into 529s or UTMAs, is it fair not to do the same for the oldest? When do you cut them off?

I'm leaning toward funding HSAs for our young adult children and including that as part of their early inheritance/20s fund. It's on the table for discussion at our next monthly budget meeting, and we'll see what Katie says. By the time this post runs, we'll probably have made a decision and, I suspect, a contribution.

What do you think? Will you be funding an HSA for your adult, non-dependent children? Why or why not?