One of the Best Triple-Taxed Advantaged Savings Accounts You’ve Probably Never Heard Of

A Health Savings Account (HSA) is a triple tax-advantaged account earmarked for healthcare expenses. I believe they are quite possibly the best savings accounts available. Here’s why. 

An HSA sounds great! How do I get started?

To be able to contribute to an HSA, you must be covered under a high-deductible health plan (HDHP), which comes with a higher annual deductible (the amount of money you must pay before insurance kicks in) than most insurance plans. In 2023, the minimum deductible to qualify for an HDHP is $1,500 for self-coverage and $3,000 for family coverage.¹ The trade-off for the higher deductible is that these health insurance plans come with lower premiums.

How much can I contribute to my HSA?

The maximum a single insured person can contribute in 2023 is $3,850. For a family plan, the maximum is $7,750. Employers may contribute to HSA funds without the employee’s need to contribute. The $3,850 and $7,750 maximum contribution numbers include employer contributions, so those numbers are the maximum that may be contributed into an HSA during a calendar year from either employee or employer funds.² Lastly, you can contribute an extra $1,000 a year if you are over age 55 ($4,850 total for an individual and $8,750 total for a family). 

How are my HSA funds taxed?

Perhaps the best thing going for HSAs is their triple-tax advantage:

1. Your contributions are both federally and state tax deductible (except in New Jersey and California), and your employer’s contributions are made with pretax dollars.³
2. The growth of the funds, once invested, is not taxed.
3. If you use the funds for qualifying medical expenses, your withdrawals are tax-free.

In contrast, IRA contributions may be tax-deductible and grow tax-deferred, but withdrawals are taxed. Roth IRA contributions can grow tax-free, and withdrawals are tax-free, but the contributions are made with after-tax dollars. The HSA’s triple-tax advantage for contributions, growth and withdrawals is unique among savings accounts. 

What can I pay for with my HSA funds?

You will receive a debit card from your HSA to pay for qualifying medical expenses. Those expenses include deductibles, co-pays, over-the-counter drugs and all other qualifying healthcare, dental and vision costs. You cannot use your HSA funds to pay for health insurance premiums, but you can use the funds if you bought health insurance coverage under COBRA or while on unemployment benefits. You can also use your HSA funds to pay for Medicare Parts B and D premiums.⁴ As with any healthcare plan, it is important to keep good records of your expenses. 

What’s better: an HSA or an FSA?

That really depends on the cost and frequency of medical care you and your family need. Money within an FSA has limitations. For example, it cannot be rolled over from year to year, so you must use it or lose it before the end of the calendar year. FSA funds cannot be invested, the contribution amount cannot be changed during the year, and they are not portable if you change jobs.⁵

An HSA also has limitations. It must be paired with a high-deductible health insurance plan, meaning that while your premiums (the amount withdrawn from your paycheck) will be lower, your deductible (the amount you pay before insurance takes over) will be higher. Because of the low premium and high deductible, HSAs tend to be a riskier endeavor. For the privilege of lower premiums, you are making a bet that you will not need to use the higher deductible.

In our view, HSAs may be best for healthy people without ongoing medical conditions. If you rarely get sick or see the doctor, you can take the combination of your contributions and your employer’s contributions and invest them in the stock market. Due to the magic of compound interest and the growth of the stock market, you can see your account grow substantially over the years.

Wait, did you say I can invest my HSA funds?

Absolutely! In my opinion, one of the best features of HSAs is the ability to invest the money within the plan, much like you would within your 401(k). Some amount of your HSA will be kept as cash to cover any short-term medical expenses you incur. Once the cash threshold is met (usually between $500 and $2,000), you are free to invest the rest. If you have  more thanthe required cash threshold and more funds are added to your HSA, your account will automatically sweep those new dollars into the investment portion. If you dip below the threshold, your HSA plan will automatically sell investments to get you back to the threshold.

Unfortunately, most HSAs in America are uninvested and held just in cash (91%, according to an Employee Benefit Research Institute study published in 2020).⁶ HSAs, like 401(k) plans, offer a wide variety of investment options that will help the account balance grow with the market. Your wealth advisor can help you review the investment options within your HSA to pair them with your age, risk tolerance and potential future medical needs. 

What happens to my HSA when I get older?

After age 55, you can contribute an extra $1,000 a year to your HSA. After age 65, you can withdraw money from your HSA for any reason. If those withdrawals are for a qualified medical expense, you won’t owe any taxes. If they are for other purposes, you will owe ordinary income tax, but no penalty will apply.⁷ When you are over age 65, HSA funds can be thought of like an IRA, but without any required minimum distributions.

You can use your HSA dollars to pay for Medicare Part B and D premiums, but not Medigap policy premiums.⁸ You can’t contribute to the HSA while you are on Medicare, but you can still use the funds. When it comes to long-term care, your HSA can be used to cover part of the cost of a “tax-qualified” long-term care insurance policy at any age, and the amount you can use increases as you get older.⁹ Check with your provider to see if your policy is qualified for tax savings. 

If I want an HSA, where do I sign?

While Health Savings Accounts are fantastic triple-taxed advantaged healthcare savings accounts, they are not for everyone. If you have high medical expenses or cannot afford a health insurance plan with a high deductible, then an HDHP (and, with it, an HSA) may not be suitable for you. If, however, an HDHP with HSA fits your medical needs, then you can make the switch during your employer’s next open enrollment window.. 

¹ https://www.irs.gov/publications/p969#en_US_2022_publink1000204030
² https://www.irs.gov/publications/p969#en_US_2022_publink1000204046
³ https://www.nerdwallet.com/article/health/what-is-an-hsa
⁴ https://www.nerdwallet.com/article/health/what-is-an-hsa
⁵ https://www.investopedia.com/insurance/hsa-vs-fsa/
⁶ https://www.cnbc.com/2021/10/15/91percent-of-people-with-health-savings-accounts-make-this-mistake.html
⁷ https://www.wellesley.edu/sites/default/files/assets/departments/humanresources/files/benefits/hsa_and_medicare_1.pdf
⁸ https://www.fidelity.com/viewpoints/wealth-management/hsas-and-your-retirement
⁹ https://www.fidelity.com/viewpoints/wealth-management/hsas-and-your-retirement

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