HSAs: The Triple Tax-Advantaged Way to Boost Your Financial Health

January 19, 2023

Not everyone has access to a Health Savings Account (HSA). But for those that do, if used properly, they are retirement GOLD.

HSAs get overlooked for a lot of reasons. One is that they are associated with health insurance, and health insurance is confusing and frustrating. Another is because the word “savings” is in the name when HSAs function best as an “investment” account to grow your wealth over the course of decades.

Because of the mass confusion about why HSAs exist and how they should be used, they often get overlooked. But if you have access to an HSA, you’ll want to strongly consider socking some dollars away in it. When used properly, the humble HSA can easily become the best retirement account in your investing arsenal, largely thanks to the myriad tax breaks it qualifies for. 

In this post we’re going to cover:

  • Why HSA’s are killer retirement tools
  • Who qualifies and general HSA rules
  • How the money can be spent later in life

Why HSAs are so awesome:

If you have access to an HSA and aren’t socking money away into it, you’re neglecting it at your own financial peril. Why? Because they are literally the most tax-advantaged account ever created. 

In fact, they are TRIPLE tax advantaged. That means…

  1. You pay no tax on contributions to HSA accounts.
  2. All investment growth and earnings are tax free
  3. You pay no taxes when you take out money for spending on qualified medical expenses

Yes, you read that right. Your HSA differs from the other retirement accounts you are more familiar with. Those offer you a tax break now, but you’ll have to pay the piper once you start withdrawing those funds. 

In stark contrast, HSA dollars, and the returns they generate, can avoid taxation altogether.

There’s a trick to supercharging your HSA, though. You can’t treat it like the ‘savings’ account it is intended to be. The key is to make sure you are investing the dollars that you are putting into it. And then, let those dollars grow and compound for years to come. That’s how you maximize the value of this account. 

How a HSA works

HSAs work kind of like brokerage accounts, in that money can be invested in financial assets (think stocks, bonds, index funds, etc). That allows you to experience compounding growth over many years or decades.

All the money put into an HSA is yours, not your employers. It rolls over every year, doesn’t expire, and you have access to spend it whenever you want. Although it is designed and typically used to pay for out of pocket medical expenses, we recommend keeping the money invested instead. 

Spending your HSA dollars before they can grow like a weed in the market deflates the immense power that this account has the ability to offer.

In order to do this you’ll need to pay for your medical expenses out of pocket. If you can pay for those doctor visits and prescription drugs from savings you have on hand, that allows you to keep the HSA money invested and growing, generating tax free wealth, for much longer.

Who is eligible for an HSA?

The IRS has set guidelines for who is eligible. At minimum, you have to have a High Deductible Health Plan. These are typically plans that have low monthly premiums, and higher deductibles for out of pocket care.

If you have a regular 9-5 job, ask your HR department if your health insurance plan makes you HSA eligible. You can always look this up on your benefits portal and when you select your health insurance plan.

HSA investing limits change slightly each year. For 2023, the limit is $3,850 for self-only coverage and $7,750 for family coverage. But if you’re 55 and older you can contribute an additional $1,000 as a catch-up contribution.

As you can see, there’s a fairly low annual limit for contributions (compared to IRAs and 401ks), but the triple tax benefit is definitely still worth it.

HSA eligibility FAQs:

I’m self-employed. Can I invest in an HSA?

Yes! If you have a High Deductible Health Plan (HDHP) you can still invest in an HSA. You can open one with Fidelity (it’s free!) and they will provide the necessary tax forms at filing time.

What if I only have an HDHP for part of the year?

The IRS calculate your contributions on a prorated basis depending on the number of months you have a HDHP plan. For example, if you have an HDHP for 6 months of the year, your contribution limit is exactly half the amount of the annual limit (eg. $1,925 instead of $3,850)

What if I no longer have a HDHP in future years?

HSA accounts are still yours and stick with you. Even if you can’t contribute, you still own the account and grow the money tax free!

What if I accidentally over-contribute to my HSA?

If you accidentally contribute more than the IRS annual maximum (and you realize the mistake before you file your taxes that year) then you can just withdraw the money — including any interest earned — and you won’t be penalized. If you don’t withdraw the funds in time, you will have to pay income taxes on any over-contribution, as well as a 6% IRS penalty fee!

How to get the most out of your HSA:

Here’s a few ways to maximize the benefits that an HSA offers:

  1. Contribute as much as you can. If you contribute through payroll deduction you save FICA (social security and medicare) taxes on those contributions too. We’ve been calling the HSA triple tax advantage, but for some folks there’s a fourth tax benefit also! The more money you are able to sock away in your HSA the better off you’ll be in retirement.
  1. Invest inside of your HSA. This is a crucial step that many fail to take, draining the HSA of its main superpower. Treating it like a retirement account is crucial. Invest in broad, low cost index funds inside of your HSA that have the opportunity to compound and grow over time. 
  1. Low fees are crucial. We always want you to avoid high fees. And just like any other investment account, certain HSA providers have done a better job of keeping fees low for their customers. Lively and Fidelity are your best bets when you’re looking for an HSA provider. They offer the fewest fees and the widest range of low-cost investment options.
  1. Leave the funds invested. Some folks withdraw money from their HSA multiple times each year, taking out a few hundred dollars here and there to pay for medical bills they incur. But not tapping your HSA is a crucial way to maximize this account. We want you to pay your healthcare bills out of pocket and let your HSA continue to grow.
  1. Hold onto your receipts. Record keeping isn’t terribly fun, but it’s a pivotal step. Keep a digital file of all the out of pocket healthcare expenses you incur. The cool thing is that there’s no time stipulation for when you are allowed to reimburse those expenses. So wait 30+ years if you can! When you finally claim your expenses, you can withdraw the money (and spend it on whatever you want). This is the secret sauce behind the HSA. Because you aren’t required to take those dollars out in the year that you incur that medical expense, you can wait years – or even decades – to do so.

Spending your HSA money

Eventually, you’re going to want to spend your HSA money (which is hopefully a rather large sum later in life) on eligible expenses. There are a LOT of things that you can spend those HSA dollars on. These include glasses, x rays, prescription drugs, and long-term care. You’ll likely need to pay for many, or even all, of these things as you age.

You can also spend HSA dollars on acupuncture, AA meetings, and allergy testing – the list is extensive. If you want a full rundown of HSA-eligible expenses, check this out.

The worst case scenario is that your HSA gets too big. You’ve just saved an invested too much! 

This is a good problem to have. It’s certainly better than the alternative. But if this happens to you, your HSA can function just like a traditional IRA (starting at age 65 instead of 59.5), allowing you to withdraw those funds for even non-medical expenses. This will eliminate one of those tax advantages, but you can just pay taxes on the money you withdraw that isn’t spent on qualifying healthcare expenses. That added flexibility makes your HSA that much better.

Here are some places you can spend HSA money:

Sooo… I have an HSA available. Should I invest? 

Before investing, it’s important to consider your overall financial situation. Do you have an emergency fund? Do you already take full advantage of the 401k match that is offered to you at work?

We created The 7 Money Gears to help people figure out their “next step” when it comes to finances. While HSA’s are awesome accounts, we recommend that you prioritize building up your emergency fund and getting that 401k match first. You might even want to start investing in a Roth IRA before you think about sticking funds into your HSA, but that depends on what your goals are for those dollars. They’re both great choices!

The Bottom Line:

HSA’s aren’t just short term savings accounts for this year’s medical expenses. They can, when you use them intelligently, be so much more!

Due to the triple tax benefits, HSAs should be part of your long term retirement investing strategy. Just make sure you are eligible to contribute to one and that you follow the IRS rules!

**Feature pic by krakenimages on Unsplash

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