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The HSA Tune-Up: 5 Insider Tips

Aaron Benway · October 24, 2017 · 6 min read


New to your Health Savings Account (HSA)?  Familiar with the HSA basics but far from an expert?  Considering open enrollment options and evaluating an HSA-qualified health insurance plan?

HSA Tips

Whatever your circumstances and financial goals, as more of us participate in High Deductible Health Plans (HDHPs) we could benefit from greater HSA knowledge and overall financial wellness.  Paired with a High Deductible Health Plan, HSAs can provide a medical “emergency savings” fund and even complement your retirement savings strategy.

To help you make the most of your HSA consider these five “insider” tips:

  1. Rollovers and Transfers – HSA consumer choice. Do you know you can select your own HSA provider?  While most first-time HSA owners create their account with the HSA contracted by their employer, many consumers prefer the features and services of other HSA vendors.  Indeed, much the way banks compete for your business, so too is the HSA market beginning to compete for your HSA account.  The IRS makes it easy for HSA owners to transfer their balances.

IRS Rules.  Like an IRA, the IRS allows you to move balances between HSA providers at your convenience.  If you move money through trustee-to-trustee transfers, similar to moving money between two checking accounts of different financial institutions, there are no transfer frequency limits.  On the other hand, if you take a distribution from an HSA directly to fund another HSA, known as a “rollover,” the IRS limits to once every year.

Best practice – allow the institutions to transfer the money between them rather than you receiving the money directly.

  1. IRA to HSA transfer. Would you like to kick-start your HSA?  The IRS allows a one-time funding of your HSA from a traditional IRA or Roth IRA contributions.  Called a “qualified HSA funding distribution” you are only allowed to do this once during your lifetime.  Further, you may only contribute an amount equal to your annual funding limit (individual/family), inclusive of any other HSA contributions you may have made for that tax year.

Why might you do this?  HSA withdrawals for medical expenses are tax free, whereas traditional IRA withdrawals are taxed at ordinary income, independent of how the funds will be used.  Particularly when done early and invested over a long period of time, re-characterizing some of your IRA funds as HSA funds can allow you to save a significant amount on your taxes for future medical expense withdrawals.

  1. 55-year old catch-up contributions. In addition to annual contribution limits, if you are 55 or older you can make an additional $1,000 contribution to your HSA.  Importantly, if you have a family plan and both spouses qualify they must each direct their catch-up contributions to individually owned HSAs.  Married couples that are each 55 or older cannot combine their respective contributions into a single HSA.

  2. Beneficiary designation and survivor benefits. You probably know your HSA balance does not expire at the end of the year the way Flexible Spending Accounts (FSAs) do.  But do you know what happens to your HSA when you pass?  One of two things:

    1. Spouse as designated beneficiary. If your spouse is the designated beneficiary at your death the HSA retains its character as an HSA and simply transfers to their custody.  The surviving spouse may continue to make tax-free withdrawals for qualified medical expenses.

    2. Spouse not designated beneficiary. If a spouse is not the designated beneficiary the account stops being an HSA.  The fair market value of the account becomes taxable to the estate or beneficiary, known in the tax world as an IRD asset.  The beneficiary is allowed 12 months to pay for qualified medical expenses for the decedent from the HSA, however.

Best practice – if you are married make your spouse the designated beneficiary and allow them to continue accessing all the HSA tax advantages and account growth potential should you pass away.

  1. Retirement Savings – HSAs and your Wealth Portfolio. Many HSA providers include brokerage accounts as an additional feature.  HSA owners may direct their savings into long term-oriented investments, similar to those found in employer-sponsored retirement savings plans (e.g. 401(k)) or individual retirement arrangements (IRAs).  With the projected costs of retirement healthcare costs continue to rise, HSAs can be a very tax-efficient addition to your long-term savings strategy.

Best practice – once you reach your annual health insurance deductible in your HSA consider directing additional HSA contributions into the brokerage account.  Many HSA experts suggest HSA owners “mirror” their 401(k) portfolio line-up as an easy default strategy for consumers.

  1. Bonus Tip – Delayed Qualified Expense Withdrawals, or Receipt “Shoe-boxing.”  The IRS does not require HSA owners to take withdrawals upon incurring a qualified expense.  In fact, the IRS says distributions may be taken “at any time.”  Because of this delayed withdrawal opportunity, HSA industry experts suggest a health expense “shoe-boxing” strategy for those who want to maximize the growth potential of their HSA.  A qualified medical expense is essentially an “IOU” against HSA funds, and therefore an HSA investor with a long-term hold period may prefer to keep the balance invested over a decade or more rather than taking periodic withdrawals.

Example – Suppose you incur a $2,000 medical expense after you have established your HSA.  Provided you have a sufficient balance you can take a withdrawal tax-free at any point equal this qualified expense.  However, were you to keep the receipt and allow the $2,000 to remain invested you could see the balance grow to a multiple of that amount over time.  So while the $2,000 could double to $4,000 over the next decade (hypothetical, but roughly average historic equity return), you could later withdraw $2,000 for the then old expense and still have an additional $2,000 of market growth left in the account.  This remaining balance is also eligible for tax-free withdrawals when made for qualified medical expenses.

Whether you are just starting out, or have been using HSAs for years but unfamiliar with the many features, knowing your HSAs options and making the most of its benefits can save you money both today and far off into the future.  Happy saving and investing.

Aaron Benway

Aaron Benway


Aaron is a Certified Financial Planner (CFP) and IRS Enrolled Agent (EA).  He co-founded HSA Coach, a digital tool to educate consumers on HSAs, track health expenses and other documents, and provide individual financial calculators, to help consumers get the most from their HSA and other savings.  To help individuals directly with their financial planning and wealth management requirements he founded AB Financial Planning.  Prior to co-founding HSA Coach, Aaron was the CFO of ventured backed fintech startup HelloWallet, acquired by Morningstar.  Aaron has an MBA from Harvard Business School and is a graduate of the US Naval Academy.

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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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