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Are HSAs tax-smart investing?

Carla Fried · June 13, 2019 · 3 min read


The monthly account statement for your investments is deceptive. The balance listed doesn’t take into account any taxes you may owe when you sell that investment.

And taxes can take a serious bite of your savings.

Any money invested in traditional 401(k)s and traditional individual retirement accounts (IRAs) will be taxed at your ordinary income tax rate when you make withdrawals in retirement.

Money in a regular taxable account may also trigger a tax bill. The gain on any investment you sell within a year will be taxed at your income tax rate. A gain for an investment you owned for at least 12 months is eligible for the long-term capital gains tax. That’ might be just 10 percent to 15 percent depending on your income, but it’s still a haircut.

If you’re looking for a tax-smart way to invest, a health savings account (HSA) should be at the top of your list.

An HSA offers three tax breaks:

  • Money you contribute each year is tax-deductible.

  • Savings inside your HSA compound without any tax bills.

  • When you withdraw money from an HSA to pay for a qualified medical expense you will owe no tax.

With an HSA your balance is not a mirage. What your account statement says you have saved up is exactly what you have to spend on qualified medical expenses. There’s no tax bite.

HSA as an investment

To be eligible to invest in an HSA you must be enrolled in a high deductible health plan (HDHP). You can then open an HSA and make contributions to the account. If your health insurance is through work, your employer may also kick in some cash for your HSA, raising its appeal even more.

You can always use the money in your HSA to cover current health care costs. Or you can make it your goal to tuck money into your HSA and leave it untouched for a few years…or decades. The triple tax break on an HSA makes it a powerful retirement investment strategy.

Given our increasingly long life expectancies—and the ever-rising cost of medical care – it’s estimated that anyone 65 years old today will need more than $150,000 to pay for out-of-pocket retirement health care expenses over a retirement that can span 20 years or more.

If you plan to pay those costs from a traditional retirement account, you will likely need to pull out a sum that is at least 20 percent more than what you need to cover the bill. For example, let’s say one year you have an illness or injury that runs up your out-of-pocket costs to $10,000. Depending on your income tax bracket (for federal, and where applicable state income tax too) you would likely need to withdraw at least $12,000 to $13,000 to net the $10,000 after factoring in the tax bill.

Moreover, if you need to pull out a lot of money from a traditional account, you could end up pushing your taxable income for the year into a higher tax bracket, compounding your tax bill.

If you instead have the flexibility to pay big medical out-of-pocket bills from your HSA savings there will be no tax bill.

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Carla Fried

Carla Fried

Carla specializes in service journalism for news outlets including The New York Times, Money magazine, and For the past 15 years she has writen for traditional news outlets, ghostwriting books and articles for clients, creating content for major financial service firms, and editing investment newsletters and white papers.

Her work appears in The New York Times, Money Magazine, Barron's and Consumer Reports.

piggy bank on pink background


2024 and 2025 HSA Maximum Contribution Limits

Lively · May 9, 2024 · 3 min read

On May 9, 2024 the Internal Revenue Service announced the HSA contribution limits for 2025. For 2025 HSA-eligible account holders are allowed to contribute: $4,300 for individual coverage and $8,500 for family coverage. If you are 55 years or older, you’re still eligible to contribute an extra $1,000 catch-up contribution.

comparing hsa versus fsa


What is the Difference Between a Flexible Spending Account and a Health Savings Account?

Lauren Hargrave · February 9, 2024 · 12 min read

A Health Savings Account (HSA) and Healthcare Flexible Spending Account (FSA) provide up to 30% savings on out-of-pocket healthcare expenses. That’s good news. Except you can’t contribute to an HSA and Healthcare FSA at the same time. So what if your employer offers both benefits? How do you choose which account type is best for you? Let’s explore the advantages of each to help you decide which wins in HSA vs FSA.

Benefits of HSA employer matching

Health Savings Accounts

Ways Health Savings Account Matching Benefits Employers

Lauren Hargrave · October 13, 2023 · 7 min read

Employers need employees to adopt and engage with their benefits and one way to encourage employees to adopt and contribute to (i.e. engage with) an HSA, is for employers to match employees’ contributions.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.



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