How to Use Your HSA
Let's talk about the greatest investment account that exists: the HSA (also known as the Health Savings Account). I know what you’re thinking: “Wait, my health insurance account is an investment account?!” Yep, and a lot of people don’t realize that their HSA is actually an investment account. And it's a damn good one too.
What is an HSA?
The HSA is a health savings account. It allows you to contribute PRE-TAX dollars to the account which you can in turn use to pay for qualified medical expenses (think doctor’s appointments, medicine, deductibles, copays, and so many other things). You do need to be on a high-deductible healthcare plan to be eligible for an HSA, so it won’t be a great fit for everyone. But if you ARE on one, don’t walk, run, and take advantage of it.
Now, I know it’s about to sound like I’m pouring a big ‘ol bowl of alphabet soup here, but the HSA is different from the FSA or HRA. If you want to learn more about the differences, I go in-depth about each type in another blog here.
The HSA is much more than just a savings account for medical expenses. Not only do the funds never expire and are yours forever, but the HSA is also the crown jewel of all investment accounts (YES, I REPEAT, IT’S AN INVESTMENT ACCOUNT)!
What Are the Tax Advantages of an HSA?
The best thing about the HSA is that it is a triple tax-advantaged account, or as I like to call it, a unicorn account 🦄. What exactly does that mean?
Our contributions are tax-free and tax deductible (we love that)
Our investments grow tax-free (oh, we love that too)
When we go to pull it out for qualified medical expenses, we don't pay taxes on that (we love that, three!)
So like an FSA, the money you contribute to an HSA is tax-deductible. Plus, any money you withdraw from the account for qualified expenses is tax-free. But here's the real kicker: the money in an HSA can be invested. Shut the front door. That's right. You can invest this money tax-free, you won’t pay taxes on the growth of the money and then when you pull it out for qualified expenses, you don’t pay taxes on that either. You receive triple tax benefits! It’s the only account that exists like this! 🦄
PLUS, your funds never expire! Yep. You heard that right. They roll over from year to year so stack that cash and make it grow (by investing it, of course). With all of those tax advantages, having an HSA is almost like your off-shore bank account in the Caymans, except it’s legal.
So to really drill this in your mind, this is how the flow of money works in our HSA:
1️⃣ We contribute money that we didn’t pay taxes on to the account ⏩ 2️⃣ We invest that money like we would invest the money in any other type of investment account (like an IRA or Brokerage Account) ⏩ 3️⃣ Our invested money grows tax-free ⏩ 4️⃣ When we go to pull it out, we don’t pay any taxes on that money either.
Again, no other account exists like that. It is the best investment account out there.
HSA Qualifications and Eligibility
Okay, Amanda, this all sounds too good to be true…
I hear ya. It IS good! And it’s also true. Buuuuuut there is a bit of a catch.
Unfortunately, eligibility for an HSA is a little hairy. In order to qualify for an HSA you must be enrolled in a high-deductible health plan (HDHP).
You also cannot be enrolled in Medicare and you cannot be claimed as a dependent on someone else’s tax return.
Qualifying for an HSA is a bit like getting on the list at the hottest new restaurant in New York City (Polo Bar, anyone?). A little tough to do, but super worth it in the end.
Not sure if you have an HDHP? Review your insurance info ASAP! If you can gain entry into this exclusive club, you won’t want to miss out.
How to Open an HSA
The good news is once you qualify for an HSA, opening one is pretty straightforward.
First, check with your employer: many employers offer HSAs as part of their employee benefits package for those employees on an HDHP. Not only that, but many match some of your funds too! FREE MONEY AYYO. If your employer offers an HSA, make sure you talk with someone in your benefits department about the specific steps to open your HSA!
If you have an HDHP but your employer doesn’t offer an HSA, you can still self-enroll through a financial institution like Fidelity or any others that offers them. Check out this list of HSA providers you can use if self-enrolling.
Now note that you won’t get that immediate tax advantage.
What's going to happen is you're going to have to file some forms with your accountant and you'll recoup that money later. But you can go open your own HSA if your company does not offer one and you're on a high deductible health care plan.
Contributing to Your HSA
There are contribution limits set by the IRS for an HSA.
For 2024, the maximum contribution limit for an HSA is $4,150 for individuals and $8,300 for families. And if you're over the age of 55, you can make an additional catch-up contribution of $1,000.
You can contribute to your HSA in three ways:
1. Payroll Deductions
Many employers will allow you to automatically allocate contributions to your HSA directly from your paycheck (you know I’m a fan of an automated setup).
2. Personal Contributions
You can make contributions to your HSA on your own and still take advantage of the triple-tax benefit.
3. Employer Contributions
While not super common, some employers contribute to employees’ HSAs as part of their benefits package (bless these employers). Usually, though, it’s a partial match if anything.
And don’t forget that the great thing about this account is that it is owned by YOU. So if you leave the company or don’t use it within the year, it doesn’t matter - it all rolls over and the funds never expire.
Using Your HSA for Medical Expenses
HSAs are designed to cover qualified medical expenses for things like doctor’s visits, prescriptions, dental and vision care, and other related expenses.
Not every medical expense qualifies for coverage by your HSA. Things like elective surgeries and expenses related to those surgeries do not qualify. Before planning to use funds from your HSA for any medical expense, verify that it qualifies by logging in to your benefit provider’s portal. You can also check out the IRS’ website which gives a very detailed explanation of qualifying expenses.
Can I Use an HSA for Non-Medical Expenses?
If you have a medical expense come up and you can afford it out of pocket, you can keep your HSA money invested for the time being and reimburse yourself later. Why would you want to do this? Well, when you get to age 65, it turns into a regular retirement account and it's no longer limited to health expenses only.
An additional bonus to all of this is if you’re paying out of pocket for all of these health expenses over the years, you can actually pay yourself back for those things that you have paid for out of pocket over the years. Think of what will happen to your money if you leave it alone and allow compound interest to do its thing! It will grow, grow, grow! So you can reap the rewards later!
You can reimburse yourself for any medical expense at any point, as long as it was incurred after your HSA was established. So if you had an expense that you paid out-of-pocket last year after your HSA was established, but want to reimburse yourself for it this year, you can do so without penalty.
Keep good records: Hang on to your receipts, bills, and any other form of documentation relating to medical expenses. This will help you prove all of your withdrawals and/or reimbursements were for legitimate medical expenses if Uncle Sam should come knocking on your door.
HSA versus FSA
So what’s the difference between the HSA and the FSA?
Well, first, let me just say, I still like the FSA. She’s just not as good as the HSA. I wouldn’t turn either of them away as they’re both great options for tax-advantaged savings on medical expenses that are already expensive AF, to begin with. But here are a few crucial differences:
The HSA has a higher contribution limit allowing you to save more $$$ in the short and long term
HSAs can cover a wider range of medical expenses
HSAs can be used as income in retirement
Have I said triple-tax advantage enough times in this post? Just in case I haven’t, there’s a triple tax advantage.
FSAs are more of a use-it-or-lose-it account with limited rollover amount whereas HSAs just grow and grow.
HSAs belong to YOU. You can change jobs or health insurance plans and you don’t lose your funds.
Wrapping Up
If you can get an HSA, run, don’t walk. It is truly the unicorn of the savings and investing universe.
What if you don’t qualify for an HSA? Well, that’s a bummer, but a lot of us don’t. Still, you need some kind of plan for how to handle medical expenses, both expected and unexpected. Check out this post where I break down all the info on other savings accounts for medical expenses to see which one is right for you.
