20 Years Helping You Live Richer

Personal finance expert Tae Kim of Financial Tortoise has likened a health savings account (HSA) to the ultimate retirement account. An HSA is a triple-tax-advantaged savings account that can be accessed through a high-deductible health plan (HDHP). It allows you to use your contributions to pay for qualified medical expenses not only now but also in retirement.

To get the most out of an HSA, one needs to take some smart steps. Kim has offered nine ways to maximize your HSA contributions. Even if you don't have an HSA currently, his insights might persuade you to consider one if you meet the eligibility criteria.

Enroll in an HDHP

A typical HDHP comes with a high deductible but a low premium. While this may seem counterintuitive, the real benefit lies in the ability to open a health savings account. However, it's important to note that HSA eligibility extends beyond having an HDHP. For example, you can't be enrolled in Medicare or have other health insurance coverage.

Kim advises calculating the financial benefits of an HSA to determine if switching to an HDHP is the right move for you. It's a decision that requires careful consideration of your financial situation.

Open an HSA

Your employer may offer an HSA, or you can open one through an HSA provider or certain financial institutions. Your health insurance company might also suggest partner providers. When choosing an HSA provider, it's crucial to carefully consider fees and investment opportunities. Kim suggests selecting a provider that offers access to low-cost broad market index funds.

Max Out Your HSA Contribution

One of the significant advantages of an HSA is its tax benefits. You can deduct your contributions from your taxable income, reducing your tax liability. Additionally, your contributions are not subject to FICA taxes. As Kim explains, "If you have a decent income, this really adds up." So, it's advisable to contribute as much as possible up to the annual limit.

In 2024, individuals can contribute up to $4,150 to an HSA, and families can contribute up to $8,300. If you are 55 or older, you can add an extra $1,000. These limits provide a great opportunity to save for your future health expenses.

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Grab Your Employer’s HSA Contribution

Some employers contribute to their employees' HSAs to help reduce their out-of-pocket health plan costs and encourage enrollment in HDHPs. Your employer may contribute a set amount or even match your contributions, similar to a 401(k) match. This "free money" can significantly increase your HSA balance.

Maximize Your Tax Savings

An HSA offers a triple tax benefit. You can deduct your contributions, and the money grows tax-free. Withdrawals for qualified medical expenses are also tax-free. Kim suggests using the money to fund a Roth IRA or a taxable brokerage account to maximize these tax savings if you've already maxed out other tax-advantaged accounts.

Don’t Use Your HSA To Pay for Immediate Medical Expenses

Many people tend to fund their HSA and immediately withdraw money for qualifying health expenses. However, Kim recommends a different approach. Pay for these expenses out of pocket and let your HSA balance grow, especially beyond your initial contribution. Since there's no deadline for HSA reimbursements, you can save your receipts and get reimbursed years later, taking advantage of the compounding effect.

Invest Your HSA Funds

Letting your HSA money sit in a savings account means it will be eroded by inflation over time. Instead, Kim recommends treating your HSA like a retirement account and investing your funds in a low-cost, broad-market index fund in the long run. As he points out, "This is how some people are able to have hundreds of thousands of dollars saved in their HSA account."

Keep Track of Your Medical Expenses and Receipts

Unlike retirement accounts, HSA funds can be accessed anytime as long as you have receipts to support eligible medical expenses. Kim emphasizes the importance of recording all medical expenses, including receipts and transaction details. This allows you to reimburse yourself whenever needed, even years later.

To avoid any issues, Kim suggests scanning receipts and tracking each eligible expense in a spreadsheet. By keeping thorough records, you can avoid taxes and penalties in case of an IRS audit.

Treat Your HSA Like a Traditional IRA After Age 65

After turning 65, you can use your HSA funds for any purpose. If you withdraw the money for non-medical reasons, it will be taxed as regular income. However, withdrawals for qualified medical expenses will be tax-free. Kim says, "You're still able to reap some tax benefits by owning an HSA regardless of having spent it all on medical expenses or not."