6 Smart ways to get more out of your HSA

Your health savings account can do so much more than pay for emergency room visits. Learn how it can help you save for retirement, pay for past expenses, and more.

At first glance, a health savings account (HSA) may seem a lot like a flexible spending account (FSA). Both let you put aside money pretax to pay for eligible medical expenses, such as copayments and deductibles. “You’re saving 30 to 40 cents on the dollar, depending on your tax bracket,” explains Michael Beloff, CFP®. Beloff is a founding partner and wealth adviser at Belvedere Wealth Partners in Stamford, Connecticut. If you contribute $3000 a year, for example, you’d net over $1000 in tax savings.

But unlike with an FSA, HSA funds roll over from year to year. So over 10 years, that $3000 contribution could add up to $30,000 in your account. Plus, you’ll save more than $10,000 in taxes.

Besides saving money, an HSA can also make you money: It can act as an investment vehicle, says Beloff. For one, the money you contribute to an HSA earns interest, just like a traditional savings account. Except with an HSA, earned interest is not taxed. Plus, you can invest HSA money in other ways, such as stocks and bonds. By the time you reach your retirement years, you could have a sizable nest egg.

There are some caveats to a health savings account. The big one: You must be enrolled in a high-deductible health plan (HDHP) to be eligible for an HSA. You also need to be mindful about how you use an HSA. For example, if you use it before age 65 for non-medical expenses, you’ll pay a steep penalty. Here are 6 smart ways to get the most out of your HSA.

Contribute as much as possible.

Putting as much into your HSA as you’re able will give you the “triple tax advantage,” notes Beloff:

  • You’re saving pretax income.
  • You’re growing your savings tax-free.
  • You can take out money tax-free at any time to pay for eligible medical expenses.

In 2022, you can contribute up to $3650 for self-only coverage. For family coverage, you can contribute up to $7300. If you’re 55 or older, you can make an extra $1000 annual contribution to your HSA.

Ask your boss to chip in.

Your employer can also provide part of your annual contribution to your HSA, though not all do. For employers who do contribute, the average contribution is $768 for single coverage. For family coverage, the average contribution is $1433. Just know that you can’t deduct your employer’s contribution from your taxes.

Invest wisely.

When you enroll in an HSA, you often have several investment options, such as stocks and mutual funds. You can invest all or part of your HSA funds. Some accounts require you to reach a certain balance first, say, about $2000. But before you invest your entire HSA, ask yourself: Realistically, how much do you expect to pay this year in eligible medical expenses?

“If you’re going to use some of the money in the next couple months, keep it in cash so you have it handy,” Beloff says. For example, what if you need a new crown to the tune of $800 out of pocket? Don’t invest that amount.

“But if you think you won’t touch it for at least 10 to 15 years, your investment strategy should be similar to what you use for other retirement assets, like your 401(k).” Think of it as part of your whole investment portfolio. You want it to have the same overall diversification strategy and risk profile.

Save your HSA for your later years.

Once you enroll in Medicare, you can no longer contribute to your HSA, says Adria Gross. Gross is CEO and founder of MedWise Insurance Advocacy in Monroe, New York. (If you’re eligible for Medicare but don’t enroll, you can continue to put money in your HSA.) The good news: As a Medicare member, you can use your HSA money tax-free to pay for Medicare premiums and eligible out-of-pocket expenses.

Even better? You can use the funds tax-free for any eligible medical expense. That includes medically necessary home renovations. One example: installing a bathroom on the first floor because you can’t climb the stairs anymore.

You can also use the HSA funds for general non-medical purposes without penalty once you enroll in Medicare, says Beloff. But in this case, you’ll have to pay income taxes on it.

Use your HSA to pay for past medical expenses.

Do you have medical expenses that added up in a previous year? Did you have the HSA when those expenses occurred? If so, you can pay them or reimburse yourself with your HSA funds at any time, says Gross. Just keep a paper trail of records and receipts. That way you can show that these expenses weren’t already paid by someone else. You can also show that they weren’t taken as an itemized deduction in a prior tax year.

Pass your HSA on to family.

If you die and your spouse is your designated beneficiary, your HSA can be transferred to your spouse tax-free. It’s simply treated as if it’s your spouse’s HSA after your death. You can also name a beneficiary other than your spouse. They will just need to report that money as part of their gross income the year that you die.

Still have questions about the best ways to use an HSA? A digital health management app such as Wellframe can help you find answers. You can search Wellframe’s private library for more information on HSAs. Or use the secure messaging system to connect with your member services team to get the answers you need.

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