8 Benefits of Your Health Savings Account

When Used Correctly, HSAs Can Be a Great Financial Planning Tool

It’s no secret that healthcare costs are on the rise and there are no signs of prices falling anytime soon. In the face of skyrocketing costs, many people are turning to their Health Savings Accounts (HSAs) to help pay for current and future healthcare costs. Often, these accounts are offered through an employer, but they can also be opened individually. To qualify, you must be covered under a high-deductible insurance plan, and if you are, you can take advantage of an impressive array of benefits.

If you have an HSA but you aren’t sure you’re optimizing it, read on for eight important benefits.

1.     HSAs provide triple-tax benefits.

One of the most appealing benefits offered by an HSA is that it’s a triple-tax advantaged savings account. This means that you’re not taxed on any contributions made into the account, your money can grow within the account tax-free, and you’re not taxed on any money withdrawn from the account – so long as you’re using the funds to pay for qualified medical expenses.

2.     HSAs can act as another retirement account.

While any qualified withdrawals you make from an HSA are tax-free, if you use your HSA funds for anything else you not only have to pay income tax, but you’re also required to pay a 20% penalty. However, this punishment only applies if you’re under 65. Once you turn 65, the 20% penalty disappears. This makes your HSA look a lot like a traditional IRA in terms of taxes. You’ll be able to pay for your medical expenses tax-free, but any other expenses you make, you’ll just have to pay income tax.

3.     HSAs have fewer restrictions.

Unlike traditional IRAs and Roth IRAs, there is no income limit for deducting HSA contributions. Additionally, IRAs require that you or your spouse have enough income to cover contributions made, whereas HSAs do not have that same requirement. The only requirements that an HSA has are that you’re covered under an HSA qualified high-deductible health plan and you’re using the funds for qualified medical expenses. (Note that you cannot be claimed as a dependent on someone else’s taxes if you want to have an HSA.)

4.     HSAs rollover.

As is the case with Flexible Spending Accounts, HSAs don’t have a use-it-or-lose-it feature. Any money put into the account carries over from year to year and continues to grow. What’s more, this money isn’t lost if you change jobs; you can bring your HSA with you or choose a new HSA custodian to transfer your savings to – tax-free.

5.     HSAs funds can be invested.

Another great benefit of an HSA is that you get to choose how the money in your account grows. You can keep your funds in basic interest-bearing accounts, or you can invest your HSA funds in stocks, bonds, or mutual funds. Both of these options can be beneficial depending on your personal situation. If you’re planning on using your contributions often to cover ongoing expenses, then keeping your money in a classic interest-bearing account is most likely your best option.

However, if you’re putting money into an HSA and have no immediate plans for using it, then using the account as an investment account may prove to be beneficial. Ultimately, it will depend on whether or not your risk tolerance is suited to the volatility of the stock market and how soon you’ll need access to the money in your HSA.

It’s important to note that not all HSAs allow for you to invest the funds – it depends on your HSA custodian. If you have an HSA through your employer, you may not get a choice in the custodian that is used. However, if you’re looking to invest your funds, you can open an HSA on your own with a custodian that allows investing and transferring your funds over to them. Since the IRS considers this a transfer rather than a rollover, there’s no limit to how many times you can do this.

6.     HSA deductibles aren’t necessarily more expensive.

Although having a high-deductible health plan (HDHP) is a requirement for qualifying for an HSA, that doesn’t necessarily mean that your deductible will be higher than it would be with a different health plan. In fact, for most plans, the maximum out-of-pocket limits for HDHPs are lower than the maximum-out-of-pocket limits for other plans. And, the gap continues to grow with each passing year. If you’re shopping for your own coverage, look to find HSA-qualified plans at the Bronze, Silver, and Gold metal levels.

7.     HSAs don’t have a deadline for reimbursing yourself.

Just because you have an HSA doesn’t mean you’re required to pay your medical bills with that account. Should you choose to cover your medical costs out of pocket, there’s also no time limit on when you can reimburse yourself. You can reimburse yourself years or decades later even – so long as you didn’t take it as an itemized deduction on your taxes and you incurred the expense after you’ve established the HSA.

This benefit can really come in handy later in life should you decide that you want to retire a few years early and cannot yet withdraw money from your regular retirement savings accounts. Should this happen, you can take all of the receipts from any medical expenses that you’ve paid since the opening of your HSA and reimburse yourself one large sum of money. All of that money that you take from your HSA to reimburse yourself will be tax-free, and not only that, because you held off on using those funds, you’ve given the money in your HSA many years to grow (tax-free), resulting in a larger account balance to depend on in retirement.

8.     HSAs can act as long-term care funds.

One of the largest expenses we face in retirement is long-term care. So, having an HSA to lean on to help offset the high costs of long-term care can be an incredible help, should you require it. This can be especially beneficial if you’re fairly healthy and don’t have too many medical expenses thrown at you. Even if you do have a good amount of medical costs, your long-term care bills are likely to dwarf any out-of-pocket medical expenses you have earlier in retirement. This is especially the case because Medicare doesn’t cover long-term care and Medicaid will only help if your income is low enough and you don’t have assets to lean on.

Even better, if you choose to save your HSA for long-term care costs and end up not needing long-term care, you can pass your HSA down to your heirs when you’re gone.

Concluding Thoughts

When looking at all of these benefits, it’s no wonder that HSAs are on the rise since their debut in 2004. As far as savings accounts, the HSA is almost like a swiss-army knife of accounts in that it offers various benefits and tools that you can use to help strengthen your wealth management plans. If you’re enrolled in an HDHP, it’s definitely worth your time to look into whether an HSA would be the right move for you. And, if you already have an HSA, be sure your fully maximizing all the advantages it has to offer.

At Paces Ferry, we believe that having the right financial planner in your corner to help you plan and implement your financial strategy is key to financial success. If you’d like to talk with one of our professionals about how you can incorporate an HSA into your retirement plan, please contact us today.

Paces Ferry Wealth Advisors, LLC is a registered investment advisor with the U.S. Securities and Exchange Commission (“SEC”).  This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.


Zachary Morris

Zachary Morris, CFP®

Having traveled to over 35 countries, Zach is a believer in Ralph Waldo Emerson’s statement that Life is about the journey, not the destination. Being a CERTIFIED FINANCIAL PLANNER™ provides Zach the opportunity to help clients define and realize their journey, and co-founding Paces Ferry Wealth Advisors, an independent firm, allows the freedom to define the client experience along the way.