This question comes from Derek in Nashville!…
“Hey, guys, I had a question today regarding HSA accounts. Is it better to pay for your medical expenses directly with your HSA account?
Or should I pay for it with a credit card to earn the two percent cash back when you reimburse yourself with the HSA account money. Thank you.”
Matt & Joel’s response: Hey Derek!
The short answer is: If you like rewards and optimizing your finances, you should absolutely pay with a credit card!
Not only will you get that sweet cash back, you can actually sit on the reimbursement claim for many years, letting those HSA funds grow larger in your account. It’s a huge tax advantage.
That being said, if it’s a relatively small amount, you might want to just pay with the debit card attached to your HSA account.
Let’s discuss it all in more detail…
How to use HSA funds – 2 methods
There are a couple ways you can use HSA funds to pay for qualified medical expenses.
The first is paying directly from your HSA account.
Most HSA and FSA plan providers will send you a debit card, allowing you to pay for your medical expenses directly from that account. This makes it easier, of course. Because you don’t need to file any reimbursement forms.
You just need to make sure those HSA funds are available in your “cash balance”. If you have funds in your HSA that are invested (and you should!), then you’ll need to sell those investments before cash can be taken out.
The other way is to pay for bills out of pocket. Then, request a claim to be reimbursed.
You can use any method to pay for those medical bills. Credit card, cash, whatever. Then you send the receipt to your HSA provider and fill out a reimbursement form.
Credit card rewards
Even though it’s a more manual process, using your own rewards credit card will allow you to earn points, miles, or cash back on those medical expenses.
And this could end up being a nice chunk! If you have a 2% rewards credit card, and you’re paying a $8,000 bill, that’s a cool $160 in your pocket!
The claim process isn’t terribly hard. All you have to do is submit your receipt to your HSA provider in order to get those funds deposited directly into your account.
It’s one extra step. But if we’re talking about a four-figure expense, I think it’s likely worth the tiny bit of extra leg work to pull it off.
Not to mention if you’re working on maxing a welcome offer, trying to hit that spending threshold, it’ll make a big difference in your ability to clear that hurdle.
HSA “Shoeboxing”
Derek, I think it’s worth mentioning that the best way to score the biggest benefits of your HSA is to leave those funds invested for years, if not decades.
There’s a sneaky technique called HSA shoeboxing…
Basically, instead of processing the reimbursement claim right away, you can file the receipt away (in a shoebox) and process it many years later. There’s technically no time limit for processing claims.
So instead of getting that money out of your account this year, you can leave it all invested in your HSA, and allow it to grow tax free!
Not everyone can do this, of course. Some people don’t have enough financial wiggle room (yet, at least…) to allow those funds to linger. Some people need to use that HSA bucket now.
But if you can think of your HSA as another long-term investment account, future-you will be very, very happy down the line.
It’s the most underrated retirement account in existence that few folks know about. Not many people treat their HSA with a long-term mindset, sadly!
HSA triple-tax advantage
Why are HSAs so freaking awesome? It’s because of their triple-tax-advantaged nature.
Every other investment account will experience taxation along the way somewhere in the process. For Roth accounts you pay tax up-front. For a traditional 401k/IRA you’ll pay tax when you withdraw those funds.
But the HSA is incredible because if you use it correctly you can avoid tax when you contribute, on all growth over the years, AND when you take that money later.
It’s a triple tax benefit. That’s why we think it’s worth any extra legwork to keep track of those receipts and file claims in later years.
It’s almost like sheltering your $ in the Cayman Islands or something (not sure how that works!) but it’s easily accessible to everyday folks.
HSA restrictions
There are a couple of HSA guidelines that people should know about.
First, to be eligible for an HSA account, you must have a high deductible health care plan. If you don’t have a HDHP, too bad, so sad, you can’t contribute to an HSA.
The next thing to watch out for is the HSA contribution limit. Eligible people can only contribute so much to an HSA each year, and it’s kind of low compared to other tax advantaged accounts.
The HSA contribution limit for 2024 is $4,150, or $8,300 if you have family coverage.
Lastly, remember that HSA funds can only be used for eligible medical expenses. If you use the funds for anything else, you’ll be forced to pony up for some hefty fees and taxes!
The Bottom Line:
If you don’t mind a little bit of legwork, it’s better to pay big medical bills with a reward credit card than it is to pay directly with your HSA account card.
The rewards from your credit card can be pretty meaningful, plus you can potentially grow your HSA funds for much longer.
If you have the financial margin to contribute meaningful amounts of money to your HSA, and can afford to not touch it for quite some time, this account can be one of the absolute best for retirement investing.
Early retirees love it because of the flexibility and tax sheltering possibilities. Their HSA can allow them to withdraw those funds at any point in the future. Just file the receipt away, and process the claim later when you want the money back in your life.
And if you want low fees to boot, Lively & Fidelity are the top two HSA providers out there!
For the full version of this discussion, check out Podcast Episode #811 (it’s the 2nd question we answer in the episode)
Related posts:
Do you recommend an app for saving or “shoe-boxing” receipts?
I think a combination of Google Docs for uploading receipt scans and a detailed spreadsheet ledger would be best. Apps are great, but, given the recent experience with Mint shutting down and millions of customers losing decades of data, I’m hesitant to trust any one specific app to keep track of it all.