HSA, the Unsung Hero


by Denise Downey

The HSA may be the most underused financial vehicle around. I wish more took advantage of its benefits. Many have never heard of it and those who know of them often confuse it with its cousin, the FSA. But the HSA, or Health Savings Account, provides some very powerful tooling to help you spend money on healthcare efficiently.

If you are on a high deductible healthcare plan, then you are eligible to save pretax money (more on this later) and invest in an HSA. This savings / investment account is specifically for medical expenses.

Money In & Money Out

In 2019, individuals can contribute up to $3,500 and families can contribute up to $7,000. It’s worth the investment, especially as your balance rises year over year.

When it comes to spending the money in your HSA, just about any medical expense you have can be eligible. Here is a short list, but there are many more expenses that qualify.

The Benefits of an HSA

Saving money in an HSA has benefits that other tax-advantaged savings vehicles, like the traditional IRA or the Roth IRA, just don’t have. An HSA offers a triple tax benefit. We’ll cover how this constellation of the HSA’s deductible contributions, tax-deferred growth, and tax-free withdrawal works for you.

Income Deduction: You can deduct contributions to your HSA from your income in the year of the contribution. For example, if you have a salary of $60,000 and your household makes the full $7,000 contribution, then you will only $53,000 will be taxed as income. It may not seem like much, but depending on your situation, it could move you to a lower tax bracket.

Tax Deferral: You can invest the money from your HSA in mutual funds, stocks, or other vehicles. This will allow your HSA’s value to grow larger over the long run. Health care expenses are increasing at a faster rate than inflation, so investing this money ensures that it will keep pace with the inflation of health care costs. Most importantly, there are no taxes on dividends and capital gains. That’s a rarity.

Tax-Free Withdrawal: In a Traditional IRA or 401k, you are taxed when you withdraw funds from your account. With an HSA, as long as the distributions are for qualified medical expenses, the distributions are tax-free. There really is nothing out there today that compares to this combination of features.

The Mystery of the HSA

The HSA is uniquely positioned to save significant sums of money for those who use them. And given that they’re often a standard part of the benefits package with most employers, it mystifies me why more people don’t take advantage.

More often than not, people, if they’ve heard of HSAs at all, confuse them with the FSA. A Flexible Spending Account is similar, in that it also permits you to spend money on medical expenses. However, the key difference is that all money in an FSA must be spent by the year end.

But the HSA has no such restriction–which makes it extremely valuable. Here’s an example of how you can use it to your advantage.

If you’re relatively healthy you can fund your HSA now and pay any minor medical expenses out of pocket while your HSA grows. You can use the HSA as a retirement savings vehicle, similar to a 401k or IRA.

Currently, medical expenses are the #1 expense for retirees. Wouldn’t it be nice to head into your golden years knowing that you have a nice, fat nest-egg designated to cover this most expensive part of retirement, tax-free?

How To Get an HSA

Check with your employer. Most employer health care plans include an HSA eligible option. Remember: HSAs can only be used when enrolled in a High Deductible Health Plan (HDHP). Many eligible plans will have “HSA eligible” or “High Deductible Health Plan” in the name of the plan.

Employers typically want you to enroll in an HDHP because it could be less expensive for them. That can also work in your favor since employers often incentivize you for enrolling in an HSA by matching your HSA contributions or dumping a lump-sum bonus into your HSA every year. Free money? Yes, please!

If you are self-employed and buying off a healthcare exchange or privately through an insurance company, you will likely still have an HSA eligible plan available. You can choose to open your HSA with many familiar custodians (Fidelity, Vanguard, Charles Schwab, etc.). Unlike W-2 employees, you won’t funds deducted from your paycheck. Simply make a deposit into your HSA when it’s convenient for you.

Wrapping Up

The HSA isn’t for everyone, but if you’re eligible and you don’t have one set up, then consider taking advantage of this savings vehicle. These savings vehicles are especially beneficial to high income individuals or families, as there is no income limit to your contributions. Many people can tell horror stories about medical expenses haunting them for years and bringing them to the brink of bankruptcy. The HSA is an incredibly powerful tool that, frankly, is underutilized. Look into it today. If you have questions or want help setting one up, reach out and we’ll get you on your way.