Health Savings Accounts once were a relatively staid way to set aside funds in an interest-bearing
account for future health care costs but have now morphed into a legitimate investment category on its
own. The reason is that HSAs may be the only account available to have a quadruple tax advantage.
Most widely known is that those covered by a qualifying high-deductible health plan (HDHP) can
contribute to an HSA with funds before they are subject to state and federal income taxes. Second,
contributions made by employers and through employee payroll withholding are not subject to Social
Security or Medicare taxes. Not even a 401(k) can boast such an advantage. Third, HSAs give you tax-
free growth inside of the account. Finally, HSAs give you the power to withdraw funds tax-free to cover
qualified health care expenses, even those incurred in previous years.
In my experience, most people with HSAs tend to fund them largely through employer contributions and
use the funds throughout the year to pay for deductibles, prescriptions, and other medical costs. Many
do not realize that with HSAs you have always been able to carry the balance from one year to the next.
Lately we’ve seen more investment companies offer HSAs, helping drive down costs and increase
investment options. So instead of using our HSA balance each year, our family focuses on building this
asset that, if used correctly, can give us tax-free growth over our lifetimes.
One analogy is that HSAs are like a Roth IRA that offers an upfront income and employment tax deduction—in other words, have your tax cake and eat it too. If you still have money in an HSA after you turn 65, you can spend the money however you want, without penalty. However, if the spending is not on qualified expenses, you will not be penalized but you will be taxed at your current income tax rate.
Contributing to HSAs. If you are covered by a qualifying HDHP, then you and your employer combined
can put aside up to $3,650 a year in 2022 for a one-person plan and up to $7,300 for a family. Catch-up
contributions of an additional $1,000 are available for those who turn 55 or older this year. Another
lesser-known aspect of HSAs is that you can supplement the employer contribution from your income to
reach the $3,650 and $7,300 maximums. Very rarely will employers max out the annual contribution.
The easiest way to deposit funds in the same account that your employer has set up. You still have time
in 2022 to boost your contributions to the maximum before the year is over as the IRS gives you until
April 15 of the following year.
Two HSA hacks. For true HSA aficionados, there is one hack that could add a boost to your financial
plan. Unlike many other tax-advantaged accounts, many experts suggest that you can take a qualifying
distribution from an HSA at any time after the health care expense was incurred as long as it was after
establishing an HSA. Some very organized HSA plan participants are documenting every qualified
medical expense for tax-free distributions in the future.
Remember that HSAs are portable, meaning that you can always seek out the low-cost, high-service
provider with quality investment options. Like an IRA, you can conduct a direct rollover from one HSA
provider to another. A riskier transfer method is a so-called indirect rollover that requires you to take
delivery of a check from your existing HSA provider and within 60 days deposit the check with your new provider or else risk paying income taxes and a 20% penalty.
If you can’t tell by now, I am a fan of HSAs as an investment vehicle. With their quadruple tax advantage,
I encourage people to maximize their contributions every year and invest them for the long-term once
they have enough cash set aside to cover a medical emergency. For many who have their emergency
fund in place and are contributing enough to receive a retirement plan match, one of the next priorities
should be making a full contribution to an HSA if eligible.
David Gardner is a CERTIFIED FINANCIAL PLANNER™ professional at Mercer Advisors practicing in
Boulder County. The opinions expressed by the author are his own and are not intended to serve as
specific financial, accounting, or tax advice. They reflect the judgment of the author as of the date of
publication and are subject to change.
