In this week’s episode, we channel Shaun of the Dead to discuss the HSA Tax Advantages in this time of pre-zombie apocalypse in which we live. I highly encourage watching Kelly’s beautiful performance as Ed, but, if you prefer to just dig into the details, keep on reading.
HSA Tax Advantages
Before we jump into strategies, we’re going to assume that most of you know what an HSA is. Health Savings Accounts (HSAs) are more than just a way to save for medical costs for those of us with High Deductible medical plans. There are also tax-advantaged. Money that goes in is PRE-tax. Any growth in this account is also tax-free, as are withdrawals for medical expenses.
HSA’s are good for those with generally low medical costs. They can work as a tax-free savings account, like a retirement account, but with the benefit of being there for a medical emergency. You have some options for maximizing HSA tax advantages, depending on your disposable income.
Optimizing HSA Savings Strategy
I am self-employed and our income can vary from year-to-year. We have a set of strategies that we follow to maximize HSA tax advantages, depending on annual finances. No matter what your income, if you have an HSA, you can take advantage of the tax savings, even at the most minimal level.
- Strategy 1: This is the best option if you can swing it. It becomes a way to stash some extra cash for retirement.
- Max money in: Put the maximum amount of money allowed into your HSA.
- Don’t spend it, invest it: Most HSAs allow you to put the money into an investment account at a certain dollar amount. Invest that money for higher returns.
- Out of pocket covered with after-tax money: Pay your bills Out-of-pocket, not using any HSA money. BUT, keep qualified medical receipts so you can pull the money out later if you have to for an emergency. There is currently no limit on the time between incurring an expense and reimbursing yourself for it from your HSA – it could be years!
- Strategy 2: This is an option if you can’t maximize. It ensures you don’t miss out on the retirement tax deduction. Plus, you kind of get a double benefit for the money.
- Money in: Put as much money in your HSA as your budget allows.
- Try not to spend it: Pay for any medical expenses with out-of-pocket money if you can afford, only using HSA funds if budgetarily necessary.
- Save receipts: Keep all qualified receipts for medical bills you paid out-of-pocket with post-tax funds.
- Maximize retirement: If you haven’t maxed out your retirement for the year, withdraw some from the HSA–up to the value of qualifying receipts–deposit that amount in your retirement account. This allows you to move the tax-free funds to your other tax-free retirement account. Withdrawals are not taxed like they would be from an HSA once you turn retirement age. Moving the money to a retirement account is a good idea if you can.
- Strategy 3: Realistically there may be some years where medical needs are heavier. You may not be able to get by without pulling some money out of your HSA.
- Money in: Put as much money in your HSA as your budget allows.
- Spend as little as budget allows: Pay for any medical expenses with out-of-pocket money if you can afford, only using HSA funds if budgetarily necessary.
- Leave as much as possible for investment: If you have enough in the HSA to move some to the HSA’s investment funds, do it. This will increase your tax-free return on investment.
- Strategy 4 – This is for those years when you have a medical expense or an income crisis, but you can at least contribute enough to get medical expenses covered tax-free. Note also, if you have qualified expense receipts that you paid with post-tax money from previous years, you can use those to pull additional cash out to cover current bills for non-qualified expenses (i.e. groceries, utilities, etc). You just need to keep track of which expenses you are claiming, from when.
- Money in: Put the most you can afford that will cover your monthly medical expenses, knowing that you will be pulling it out nearly immediately to pay for qualified expenses.
- Money out same year: Use the money to pay for monthly qualified expenses.
Plan Your HSA Tax Advantages Strategies
Every year is a bit different for us and we try to follow this sliding scale of strategy options. Some years are better/easier than others, but no matter which HSA tax advantages strategy you are able to take advantage of from year-to-year, there are things you need to consider:
- Keep really good records in case of an audit. An audit may require you to show documentation for withdrawals. You are not required to withdraw money in the same year you incurred the qualified expense. You will, however, have to make have receipts from previous years to cover the amount you withdraw.
- Once you hit retirement age, you can withdraw HSA money and use it for whatever you want. However, any withdrawals used for non-medical expenses will be subject to standard income tax. As long as you have qualified receipts to cover withdrawals, you’re gold.
- Invest money from your HSA in lower risk funds. This is because HSA funds are more likely to get used early if there is a medical need. Plus, it allows you to have higher risk funds in other traditional retirement accounts to keep overall target allocations in balance.
- Both members of a married couple can each have an HSA. Your medical plan dictates your contribution cap. Family plans have higher limits than individual plans. If one half of a couple is covering medical expenses via a family plan, be sure to coordinate how much each person is contributing to their HSA so limits are not exceeded.
- You can add an additional $1k into your HSA account if you are 55+. This is for individuals. If both you and your spouse have separate HSAs and are 55+, you can contribute $1k per HSA. I will be eligible in 2024 and will start contributing the $1k to my HSA. In 2026 Kelly will be 55 and she will contribute an additional extra $1k to her HSA.
- Keep at least one year’s deductible in cash. Invest the rest. This is our rule of thumb, but again, we evaluate from year-to-year.
More than Just Medical Savings
You can see that HSA’s can be much more than just a place to put money for doctor’s bills. If you take a full look at your investment strategies, you can maximize your retirement savings by using the HSA tax advantages available. We hope that you enjoyed our tips. If you have any questions or tips of your own to share, please leave us a comment.
Happy Living!
Steffan (& Kelly)
P.S. if you don’t want to miss one of our amazing financial based performances, be sure to subscribe to our Living The Middle YouTube channel!
