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Health Savings Accounts

Health Savings Accounts were created to be a savings vehicle for medical expenses in short-term, but they can also be one of the most tax-efficient long-term retirement savings strategies.

How does it work?

A Health Savings Account (HSA) is a type of tax-advantaged savings account that is designed to be used for medical expenses. HSA’s are available to individuals and families who are covered by high-deductible health insurance plans. To be a high-deductible plan it must have a minimum deductible (2021: $1,400 for individuals and $2,800 for families) as well as a maximum out-of-pocket expense (2021: $7,000 for individuals and $14,000 for families)1.

As far as the tax benefits go, money is contributed to your HSA on a pre-tax basis and contributions can be made by an individual or their employer. There is no income limit to make contributions, unlike some retirement accounts, but there is a maximum you can contribute (2021: $3,500 for individuals and $7,200 for families)1. If over age 55, each maximum contribution amount increases by $1,0002. There is not a “use it or lose it” rule with HSA accounts so these contributions can compound over time.

Additionally, money in the account can be invested and grows tax-deferred (no taxes are due on the interest, dividends or capital gains while the funds stay in the HSA account). If the funds are distributed from the account for qualified medical expenses, the distributions are made tax-free. This distribution rule is why HSA accounts are sometimes referred to as “triple-tax exempt”. The funds go in pre-tax, grow tax-deferred and can also be distributed tax-free for qualified medical expenses.

If the funds are distributed from the HSA account for non-medical expenses, the taxation will depend upon your age when withdrawn. If prior to age 65, the distributions would be subject to ordinary income plus a 20% penalty. If after age 65, the 20% penalty does not apply and the distribution is taxed as ordinary income.

HSA Strategies

The most common use for the HSA is for people to make contributions to their HSA and then use that money to pay for medical expenses as they come up. The money may only sit in the HSA for a short amount of time and the HSA acts like a revolving door of money in and money out. There is certainly nothing wrong with doing this, it would still be paying for medical expenses with pre-tax dollars, but this approach can be improved upon if you have the cash flow to pay for those medical expenses out-of-pocket (not with the HSA account).

If you pay for those medical expenses out-of-pocket and avoid making distributions from your HSA, you have the potential of years of compounding growth that could grow to a substantial balance that can still be used for medical expenses tax-free. The list of qualifying medical expenses is fairly simple for day-to-day items such as doctor bills and medication. However, when using the strategy of allowing the HSA to grow, you may find that the HSA is the perfect account to pay for long-term care premiums or Medicare premiums – both would be tax-free withdrawals. If you choose to use the HSA funds for other expenses during retirement, the taxation would be the same as if you made deductible IRA contributions (ordinary income but not penalty). Since deductible IRA contributions are limited based on earnings, it can be a way for high-earners to reduce their current tax burden since HSA contributions are an above-the-line deduction.

Another unique strategy for those with HSA accounts and are willing to pay for current expenses out-of-pocket is to collect the receipts for the items being paid out-of-pocket. These expenses can be reimbursed by the HSA account as long as they were incurred during the time you were covered by a high deductible plan. There is no time limit for when you pay yourself back for these expenses so you could keep the receipts and pay yourself back years in the future at any point when you decide you’d like those funds. The distributions would be tax-free so by keeping those receipts, you give yourself a lot of flexibility to take a tax-free withdrawal at any point in the future (ideally timed to when you are in a higher tax bracket or pursuing another tax planning strategy).

Our general recommendation is that clients should max out HSA contributions each year and invest these funds for long-term growth, but, as you can see, there are many rules and nuances to health savings accounts. We want you to be aware of these rules and use the HSA account to its full potential. As always, please feel free to reach out to find out how an HSA may be best incorporated into your overall financial plan.



1 IRS.gov Publication 969

2 If each spouse is over age 55 and on a high deductible plan, it is better for each spouse to have an individual HSA account and contribute $4,600 ($9,200 total) instead of one HSA account contributing the family maximum of $8,200. Source: Ed Slott’s IRA Advisor July 2021

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. You may also visit your state’s insurance department for more information.