by Victoria 

How to Make the Most Out of Your Health Savings Account


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written by: victoria mcgruder, cpa, cpwa®

The Health Savings Account or HSA is a tax advantaged investment vehicle for the primary purpose of saving for future medical expenses.

The HSA allows you to contribute pre-tax dollars, the funds grow tax FREE and are withdrawn tax FREE so long as the funds are used for qualified medical expenses.

It is the ONLY investment vehicle available with this “triple tax advantage.”

Not only can a Health Savings Account be a valuable and meaningful tool to save for future medical costs, but it can also be used as another form of retirement savings….read on!

But First, The Basics of a Health Savings Account

Who Can Contribute to a Health Savings Account?

  • You are able to contribute to a Health Savings Account when you are enrolled in a high deductible health insurance plan and are not receiving any additional coverage such as Medicare.
  • There are no income limitations that impact your eligibility to contribute to an HSA.
  • In 2021, the maximum contribution to a health savings account is $3,600 for individual coverage and $7,200 for family coverage. (Age 55 until you enroll in Medicare, you are able to contribute an additional $1,000)

How Does it Work?

  • The contributions will go in pre-tax, meaning that they will reduce your taxable income.
  • The funds invested will grow tax free and are eligible for tax free withdrawals so long as the funds are used for qualified medical expenses. If the withdrawals are not used for medical expenses (prior to age 65) then you may trigger a 20% penalty and will be responsible for paying tax on the withdrawal.
  • There is no time limit in which you are required to use the funds. (This is different from a Flexible Spending Account or FSA where if you don’t use it, you lose it)
  • The Health Savings Account is yours and yours to keep. If you leave a firm, you have the option to leave it where it is or roll it over into a new account with your new employer.
  • Upon age 65, you are able to withdraw the funds from the account for non-medical expenses penalty free but will be required to pay income tax on the distributions.

What is a High Deductible Health Plan (HDHP)?

Again, in order to be eligible to contribute to a Health Savings Account, you are required to be enrolled in a high deductible health insurance plan.

A high deductible plan typically has lower premiums, but higher deductibles.

So if you have a high deductible plan through your employer, your bi-weekly payments towards your health insurance (premiums) will be lower than had you chosen a PPO plan. However, in the event that you require significant medical attention, your deductibles will be higher to reach and thus requiring you to pay more out of pocket until insurance kicks in.

Who Does the Health Savings Account Make the Most Sense For?

High Deductible Plans are typically most appropriate for those who are in good health, not expecting large medical bills and do not make frequent trips to the Doctors. In addition, it makes sense for those who are willing to take on the higher risk in assuming their medical costs will be predictably low in the coming year.

Individuals with significant wealth are also good candidates for the high deductible plans & HSA combo. They will be able to reduce their taxable income by maxing out their HSA, benefit from the tax free growth of funds, and meanwhile have the means to afford out of pocket medical costs should they arise.

In my opinion, both high net worth individuals and individuals who are in their 20’s and 30’s, in good health and without children would be ideal candidates for the high deductible plan in combination with contributing to an HSA.

The Biggest Mistake I See with the Health Savings Account

People will contribute to it, but never invest in it.

Why? Because their understanding of the account is that its purpose is to pay for medical expenses. So why would one invest when they plan to use the funds year after year for ongoing medical expenses like doctors visits, prescription medications, etc.?

Well, what they don’t realize is that instead of using the funds for minimal medical expenses here and there, they could be investing and allowing the account to grow tax free for years! And that the account could be used on significant medical costs and/or for tax deferred retirement funds in the future.

**If your company is offering a match into your HSA, this should be another huge motivator for you to contribute at least up to their match percentage!**

The 2 Ways To Think About Using an HSA for Your Future

Saving and investing the funds in the HSA for significant future medical costs and benefiting from the tax free growth and tax free withdrawals.

  • Consider using non-HSA funds for current medical expenses and investing the HSA funds in order to benefit from compounding tax free growth for years to come.
  • By investing the HSA and allowing it to grow tax free over time, you will be preparing for the inevitable wave of increased medical bills that arise during retirement.
  • Save the HSA funds for significant future medical costs like surgeries, unexpected treatments, emergencies, etc.
  • You are also able to use the funds in the HSA for your dependents you claim on your tax return – so think kiddos and their future medical expenses.

Future Retirement Savings

  • Worst case scenario…or best case scenario depending on how you look at it….Let’s say you are absolutely blessed and never have a significant medical bill come your way. But you have quite a bit saved up in your HSA….
    • Then by age 65, you no longer are required to use the funds for qualified medical expenses. You may withdraw the funds, penalty free, BUT will be required to pay the income tax on the distribution. So in essence, it was a tax deferred retirement savings vehicle for you.

Beneficiary Note*** By putting your spouse as the beneficiary of your HSA, the HSA will continue to honor its tax free status upon transfer to spouse. If you put a non-spouse as the beneficiary of the HSA, the HSA will become taxable to the beneficiary in the year of death.

Check out the two other tax free investment vehicles for your future from the blog – 529 College Savings Plans & Roth IRAs!


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I'm a financial advocate, coach, and blogger on a mission to help you build wealth with confidence! 

Having worked closely with countless clients over my 14 year career, I've gained a very deep understanding of money management and effective planning strategies in guiding individuals and families towards financial success. Now, I want to share that wealth of knowledge and insight to empower YOU to take control of their finances, make well-informed decisions, and create a life of abundance without the stress of finances looming over you. I'm so glad you're here! 

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