A couple years ago, I decided to switch from a standard healthcare plan to a High-Deductible Healthcare Plan (HDHP) with a Health Savings Account (HSA). Why?
I was the only one in my family (out of my husband, son and me) really using our standard healthcare plan, and felt like we were overpaying. The more I looked into a HDHP with HSA, the more I was convinced it was right for us. The premiums were half of what we were paying with a standard plan, and the HSA was a savings tool with triple tax benefits!
First Things First!
An HDHP is just that – there’s a high deductible you have to pay before your coverage kicks in.
No, Gladys, that should not be a surprise.
For us, our deductible is $3,400/year, but my health plan pays $2,000/year (into my HSA), so our deductible is really $1,400/year.
So if you choose an HDHP, you better have a couple Gs sitting around for when you need to pay out of pocket early in the year that first year.
When I first started, I put the difference between my old premium for the standard plan and the new (much lower) premium into the HSA since I was already used to living without that money.
That allowed the balance of my new shiny HSA to grow without having to change that particular spending habit.
Now Let’s Talk about the HSA
An HSA is a type of savings account that allows individuals with HDHPs to set aside pre-tax dollars for medical expenses. It’s actually also a sneaky investment vehicle. Oh, and unlike a Flexible Spending Account (FSA), you can carry over the balance year over year.
One of the key benefits of an HSA is its “triple tax benefit.”
Here’s How it Works
- Contributions are tax-deductible: Contributions to an HSA are made with pre-tax dollars, which reduces your taxable income for the year. The means you’ll pay less income tax now.
- Earnings grow tax-free: The funds in your HSA grow over time, and any interest or investment earnings are tax-free. This allows your HSA balance to grow faster than a regular savings account.
- Withdrawals for qualified medical expenses are tax-free: When you withdraw funds from your HSA to pay for qualified medical expenses, the withdrawals are tax-free. This means you won’t pay income tax on the money you withdraw for eligible medical expenses.
Now let’s talk about what happens when you turn 65.
At age 65, you can use your HSA funds for any reason, not just qualified medical expenses. This could give you more flexibility in retirement.
Using HSA Funds at 65 for Older Non-Medical Expenses:
- If you withdraw HSA funds for non-medical expenses (i.e. not qualified medical expenses), the withdrawal will be subject to ordinary income tax. This means that the withdrawn amount will be added to your taxable income for the year, and you’ll pay income tax on it according to your tax bracket.
- However you will not be subject to the 20% penalty that typically applies to non-qualified withdrawals before 65.
To illustrate this, let’s consider an example:
Suppose you have $50,000 in your HSA at age 65, and you withdraw $10,000 to fund a vacation. The $10,000 withdrawal will be added to your taxable income for the year. If you’re in a 24% federal income tax bracket, you’ll owe $2,400 in income tax on the withdrawal (24% of $10,000), but you will not be subject to the 20% penalty for it being a non-qualified withdrawal.
A Strategy for Maximizing Your HSA Bennies:
Step 1: Max out your HSA Contributions
- Contribute as much as possible to your HSA each year, up to the annual contribution limit set by the IRS. For 2026, the limits are $4,400 for individuals and $8,750 for families. If you’re 55 or older you can contribute an additional $1,000 as a catch-up contribution.
- Consider contributing through payroll deduction to take advantage of pre-tax contributions
Step 2: Invest your HSA Funds
- Once you’ve built up a sufficient balance in your HSA, consider investing some or all of the funds (similar to a Roth IRA, you could just let it sit as is, and not earn jack squat, or you can invest it). Many HSA providers offer investment options, such as mutual funds or Exchange-Traded Funds (ETFs). I keep $1,000 as cash in my HSA and automatically invest the rest in an ETF for anything more than that.
Step 3: Keep Track of your Medical Expenses
- Keep receipts and records of all your medical expenses, including copays, prescriptions, and other qualified medical expenses.
- You can use a spreadsheet (#ILOVESPREADSHEETS), app or other tool to track your medical expenses and keep them organized
The “Let it Grow” Strategy
- Instead of using your HSA funds to pay for current medical expenses, consider paying out-of-pocket for them instead
- Allow your HSA funds to grow over time, potentially earning investment returns and compounding tax-free
- By doing so, you can create a pool of funds that can be used for future medical expenses or other expenses in retirement.
Reimbursing Yourself for Old Medical Expenses
- At any time, you can reimburse yourself from your HSA for qualified medical expenses you’ve incurred since opening the account
- To do so, simply submit a claim to your HSA provider, along with documentation (such as receipts) to support the expense
- You can reimburse yourself for expenses dating back to the date you opened your HSA, as long as you have the receipts and documentation to support the expense
- There is no time limit for reimbursing yourself for old medical expenses, as long as you have the necessary documentation
Key Benefits of this Strategy
- By maxing out your HSA contributions and investing the funds, you can create a tax-advantaged source of funds for future medical expenses or retirement
- By keeping track of your medical expenses and reimbursing yourself from your HSA, you can effectively use your HSA as a savings vehicle, rather than just an expense reimbursement account
- If you don’t need the funds for medical expenses, you can use them for other expenses in retirement, subject to income tax (but no penalty after age 65).
An HSA isn’t just a medical account—it’s a stealth retirement tool.
🐝 That’s the buzz for today – go forth and make great money decisions!
Disclaimer: The Budget Bee provides educational content only and does not provide individualized financial, investment, tax, or legal advice. Please consult a qualified professional for advice specific to your situation.