Parker G. Trasborg, CFP®
Parker G. Trasborg, CFP®Senior Financial Adviser

In today’s world where healthcare costs are always on the rise and financial planning is more crucial than ever, Health Savings Accounts (HSAs) have emerged as a valuable tool for individuals and families alike. Offering a unique blend of health and wealth benefits, HSAs provide a tax-advantaged way to save for medical expenses while also offering potential long-term investment growth. HSAs are unique in that they offer a triple tax advantage – contributions are pre-tax, thus lowering your taxable income, the dollars in the HSA grow tax-free, and future distributions come out tax-free if used for a qualifying medical expense.

Understanding Health Savings Accounts (HSAs)

At their core, HSAs are tax-advantaged savings accounts available to individuals enrolled in high-deductible health plans (HDHPs). These accounts allow you to set aside pre-tax dollars to pay for qualified medical expenses, including deductibles, copayments, and other out-of-pocket costs. Unlike Flexible Spending Accounts (FSAs), funds in an HSA roll over from year to year and are yours to keep, even if you change health plans or employers.

The Benefits of Health Savings Accounts

  1. Tax Advantages: Contributions to an HSA are tax-deductible, reducing your taxable income for the year. Additionally, any interest or investment earnings within the account grow tax-free, and withdrawals used for qualified medical expenses are also tax-free. This triple tax advantage makes HSAs one of the most powerful savings vehicles available.
  2. Ownership and Portability: Unlike employer-sponsored health accounts like Flexible Spending Accounts (FSAs), HSAs are owned by the individual. This means you can take your HSA with you if you change jobs or health insurance plans, providing flexibility and continuity of savings.
  3. Long-Term Savings Potential: While many people use HSAs to cover immediate medical expenses, these accounts also offer a valuable opportunity for long-term savings. Once you reach a certain balance, typically around $1,000, you can invest your HSA funds in a range of investment options, such as mutual funds or stocks, allowing your savings to potentially grow over time.
  4. Retirement Planning: One of the lesser-known benefits of HSAs is their potential to serve as a supplemental retirement account. After age 65, you can withdraw funds from your HSA for any purpose penalty-free (though non-medical withdrawals are subject to income tax). This makes HSAs a valuable tool for covering healthcare costs in retirement, which can be substantial for many individuals.

Maximizing Your HSA

  1. Contribute Regularly: Take advantage of the tax benefits of HSAs by contributing the IRS maximum each year. For 2024, the annual contribution limit is $4,150 for individuals and $8,300 for families, with an additional $1,000 catch-up contribution allowed for those aged 55 and older.
  2. Use it Wisely: Be strategic about when you use your HSA funds. Consider paying for minor medical expenses out-of-pocket and allowing your HSA balance to grow over time. This way, you can harness the power of compounding interest and investment growth for long-term savings.
  3. Invest for Growth: Once your HSA balance reaches a comfortable level (perhaps the annual deductible amount or max out of pocket amount), consider investing a portion of your funds in diversified investment options. Like any investing there is risk involved, but investing your HSA funds can potentially yield higher returns over time, helping you build wealth for the future.
  4. Save for Retirement: You can treat your HSA as a supplemental retirement account by prioritizing long-term savings. If you’re able to cover current medical expenses out-of-pocket, consider leaving your HSA funds untouched and allowing them to grow tax-free until retirement.
  5. Keep Track of Expenses: To ensure compliance with IRS regulations, keep detailed records of your medical expenses and HSA withdrawals. This will make it easier to substantiate any withdrawals in the event of an audit and ensure that you’re using your HSA funds appropriately.

Health Savings Accounts (HSAs) offer a unique combination of health and wealth benefits, providing individuals and families a tax-advantaged way to save for medical expenses while also offering potential long-term investment growth. By understanding how HSAs work and implementing strategic savings and investment strategies, you can maximize the value of your HSA and secure your financial future. Whether you’re using your HSA to cover current medical expenses or saving for retirement, HSAs are a valuable tool for achieving both health and wealth goals. As always, every situation is different, and we are happy to discuss the utilization of HSAs as part of your overall financial plan.