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How to Maximize your HSA

5 min read

30 sec brief

A few key moves today can create big gains for you down the line. Health savings accounts (HSAs) offer an unbeatable lineup of tax breaks that can go a long way to helping you build financial security.  Here’s how to get the most value from your HSA account:

A few key moves today can create big gains for you down the line.

Health savings accounts (HSAs) offer an unbeatable lineup of tax breaks that can go a long way to helping you build financial security.  Here’s how to get the most value from your HSA account:

HSA Tips

  1. Contribute the maximum. There are annual limits for what you can contribute to your HSA account. The limits are adjusted from time to time to stay in sync with inflation. Make sure your contribution is set to the maximum allowed each year.
  2. Pay current medical bills from other accounts. Yep, you read that right. Once you put money in an HSA make it a goal to not use the money to pay current bills. By covering your current costs from other savings or cash-flow you can leave your HSA money to grow. That’s going to pay off big time when you retire.

Tip: Whenever you pay a medical bill out of pocket, save a copy of the bill and receipt. You can tap your HSA to reimburse you for qualified expenses at any time—even decades after you paid the bill. That can be a neat way to give yourself a chunk of tax-free income down the line. (See #5 for more details.)

  1. Treat your HSA account like a retirement account. An HSA has more tax breaks than standard retirement accounts.

There’s no escaping taxes with Traditional or Roth 401(k)s, or Individual Retirement Accounts (IRA). At some point, taxes are due.

An HSA is a bit of a tax Houdini. You never have to pay a penny of tax on money you withdraw as long as it is used to pay for qualified medical expenses. That makes it extra valuable to treat your HSA like a retirement account today. Save as much as you can each year, invest it for growth, and then in retirement pull money out tax-free to cover your medical costs.

  1. Invest your HSA for growth. If you use an HSA to cover current medical expenses, it is wise to keep your money in a safe bank savings account. But once you make the decision to maximize your HSA by treating it like a retirement account, you should consider investing your HSA account for long-term growth. Over time, stocks and bonds offer the chance of earning higher returns than a bank savings account.

A simple HSA investing hack: Consider a mix of stocks and bonds that mirrors the diversified investing strategy you already figured out for your other retirement accounts.

  1. Make tax-free withdrawals in retirement. You can, of course, use your HSA account to pay for qualified expenses at any time. But tapping the account in retirement can be especially smart.

A lot of your income in retirement will be taxable. Required withdrawals from traditional 401(k)s and IRAs counts as taxable income, and your Social Security benefit may also be taxable. Got an old-school pension? Lucky you. But pension payouts also count as taxable income.

Add it all up and often times retirees are unpleasantly surprised at their tax bills. That’s where an HSA can shine. Money you withdraw will be 100% tax free.

That can be extra valuable if you have a big unexpected expense. If you dig into your 401(k) or IRA accounts to make a bigger withdrawal, your taxable income will rise for that year. But if you pull the money out of your HSA, there is no impact on your taxable income.

And if you’ve saved all your old medical bills you can even take a big withdrawal and use it for anything—not just medical expenses. For instance, let’s say that over the years you paid $25,000 out of pocket for a variety of medical expenses. As long as you have all the documentation, you could take $25,000 out of your HSA years later, pay no tax, and then use the money for anything. A new car. Jumpstarting the grandkids College 529 savings plan. Maximize your HSA strategy today can give you valuable tax savings down the line.

If you need more help with health account decisions, check out our blog. We will make you a healthcare benefits expert in no time, without any extra work or effort on your end.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered 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 investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.

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.

About the author

Carla Fried

Carla translates business and personal finance concepts into engaging content that helps individuals make more confident choices in how they manage their money. Her work appears in The New York Times, Money Magazine, Barron's and Consumer Reports.

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