How To Make The Most Out Of Your Health Savings Account

Health Savings Accounts are more than meets the eye. They're one of the tax-advantaged savings vehicles in the tax code but most people aren't maximizing their HSAs to their full potential. 

Have access to an HSA but not sure how it works or how to use it?

This article's for you. 

Let’s break down how HSAs work, who can use one, and how they can accelerate your retirement savings. 

In’s and Out’s of HSA Accounts

Triple Tax Advantage:

1. Contributions are tax-deductible: Every dollar you contribute to your HSA reduces your taxable income for the year. Unlike other accounts like a Traditional IRA, there’s no income limit to receive tax deductions on contributions.

2. Investments grow deferred: The money in your HSA can be invested in mutual funds, stocks, or other investment vehicles, and any gains from these investments grow tax deferred.

3. Withdrawals for qualified medical expenses are tax-free: When you use HSA funds to pay for eligible medical expenses, those withdrawals aren’t taxed either. It doesn’t matter if you contribute funds and then pull them out a week later or 10 years later to pay for qualified medical expenses, the contribution and earnings come out tax-free.

That’s a sweet deal.

Invest and Grow

Once you’ve built up enough to cover your deductible, consider investing the extra funds. Many HSAs offer investment options similar to retirement accounts, helping your money grow over time.

Example: 

Let's say you contribute $3,000 to your HSA annually. Assuming a 25% federal marginal income tax rate, your $3,000 contribution would reduce your taxable income by $750. 

Over the next 20 years, if your investments grow at an average of 6% annually, your HSA could grow to roughly $110,000, all tax-free.

No Rush to Spend

Unlike Flexible Spending Accounts (FSAs), HSA funds roll over year to year. So, you don’t need to rush to spend the balance – let it grow!

Retirement Boost

After age 65, you can use HSA funds for non-medical expenses without penalties. 

You’ll pay ordinary income tax, similar to a Traditional IRA or Traditional 401(k), but the tax advantages and flexibility along the way make it worthwhile.

HSAs Are Only Available For Those Enrolled In A High Deductible Health Plan

Unfortunately, not everyone will have access to a HSA, depending on what health plan you choose. 

Why?

HSAs are only available for those enrolled in a high-deductible health plan (HDHP).

While it’s a bummer not everyone can use an HSA, it does make sense.

High Deductible Health Plans typically have lower initial premium costs but higher out-of-pocket costs for participants. Thus, the HSA was created to help you save for these out-of-pocket costs.

Smart Use of Funds

HSAs aren’t just for immediate expenses. 

You can reimburse yourself for past medical expenses years later if you keep good records (bills, receipts, etc.). This flexibility means you can let your HSA grow while waiting to use the funds strategically.

Example: Let’s say you have knee surgery in 2024 and the out-of-pocket costs for surgery and physical therapy ends up being $5,000.

Let’s say it’s 2035, you’re retired and wanting to take a trip but don’t want to pull money from your traditional retirement accounts and incur income taxes.

If you saved your receipts from your 2024 knee surgery, you could reimburse yourself for $5,000 from your HSA in 2024 (tax-free) and use the funds to pay for your trip.

Paying for Long-Term Care

Long-term care is a significant expense for many retirees. As of 2022, the nationwide annual cost of a year at an assisted living facility was $64,000 and nearly double that for a semi-private room at a nursing home facility. 

It goes without saying that an HSA can be a lifesaver here. You can use HSA funds to pay for long-term care insurance premiums (within limits), in-home health care, nursing home fees, and assisted living costs.

Coordinating With Other Retirement Accounts

HSAs can complement your other retirement accounts. While 401(k)s and IRAs are great for general retirement savings, HSAs can provide a dedicated source for healthcare costs, and in some cases more flexibility and tax benefits.

Wrap-Up

HSAs are versatile, tax-advantaged, and can significantly enhance your long-term financial health. 

But they’re not for everyone. You must be enrolled in a High Deductible Health Plan. 

HSAs provide unique long-term benefits for those who can afford to pay for medical costs out-of-pocket instead of tapping their HSA, but it takes some extra time and effort. 

That being said, it can be one of the most valuable tools in your retirement toolbox.

About The Author

Caleb Pepperday, CFP®, ChFC® provides Fee-Only Financial Planning and Investment Management Services for medical professionals. Advanced Practice Planning, LLC is based in Missoula, MT, but works with clients in a virtual capacity nationwide.

As a CERTIFIED FINANCIAL PLANNER™ and fiduciary, Caleb Pepperday works to create financial plans for medical professionals with their best interest in mind. As a Fee-Only financial planner, Caleb Pepperday is only compensated through the investment management or financial planning fees that you pay him directly and never earns a commission.

Caleb Pepperday primarily focuses on helping mid-career and pre-retiree Physician Assistants/Physician Associates retire with confidence.

Disclosures:

The information provided in this article is for educational purposes only and is not intended as financial, legal, or tax advice. No content within should be construed as such. The material presented is based on general financial principles and concepts, and individual financial and tax situations may vary. Readers are strongly encouraged to consult with a qualified financial advisor, tax professional, or legal expert for personalized advice regarding their specific financial, tax, or legal circumstances. Any actions taken based on the information in this article are at the reader’s own discretion and risk. The author and publisher make no representations or warranties regarding the accuracy, applicability, or completeness of the information provided. This article does not endorse or promote any specific financial products, services, or companies. Readers are responsible for conducting their own research and due diligence before making any financial, legal, or tax-related decisions.