How to Get the Most Out of Your HSA Account

Why Are HSA Accounts So Popular?

There are a lot of reasons why people love HSAs so much.

According to Devinr, nearly 36 million people have health savings accounts, collectively holding some $116 billion in assets.

That’s up quite a bit from their humble beginnings in 2007!

This consistent upward trend in HSA balances demonstrates how beneficial these plans can be for both health management and financial planning purposes.

HSA Accounts Have No Income Restrictions

Unlike IRAs and other similar retirement accounts, HSAs have no income caps on contribution eligibility. You can contribute the annual maximum to your HSA, no matter how much money you make.

The higher your income, the more valuable the HSA becomes, because as your tax bracket gets higher, the value of the tax breaks the HSA represents

Portability

HSAs are portable.

That means you can take them with you when you leave your job.

This is a huge advantage over Flexible Spending Accounts (FSAs), which require you to forfeit the money when you leave your employer.

Additionally, new laws now allow HSA funds to cover expenses like over-the-counter medications and feminine hygiene products.

Flexibility: You Remain in Control

HSAs also help you keep control over your own money and how you use it.

For example, you can use your HSA to escape narrow PPO, EPO, or PPO networks and see any doctor or use any hospital you choose.

You are in control, not your insurance company!

How to Get the Most Out of Your HSA Account

1. Get an HSA-Eligible Health Plan

There are two options for opening a HSA: you must either be enrolled in a qualified HDHP, or you may be eligible to enroll in the HSA MEC plan.

Let’s take a closer look at both options.

High Deductible Health Plan (HDHP)

HDHPs are a type of health insurance plan that have the following features:

• Higher Deductibles – Deductibles are typically higher than for other more traditional insurance plans, so that means you’ll have to pay more before your insurance kicks in to cover expenses. 
• Lower Premiums – Conversely, the monthly premium is typically lower than other plans, so they can be a more affordable option for those who don’t have ongoing medical needs.
• Out-of-Pocket Maximums – They do include an out-of-pocket limit and once you’ve paid this amount within a year, the plan will cover 100% of all other eligible expenses.
• Preventative Care – Preventative care, such as screenings and vaccinations, are usually provided under the plan even if you haven’t yet met the deductible.

If you are in good general health and don’t need a doctor very often, a HDHP can be a great choice. You can contribute the savings pre-tax into your HSA.

As long as you are using this money for qualified healthcare expenditures, there’s no penalty for making withdrawals!

*It should be noted that withdrawing this money for anything other than healthcare expenses under the age of 65 will require you to pay income taxes on the amount you withdraw, as well as a 20% penalty. After age 65 the 20% penalty for nonqualified withdrawals goes away. You just pay income tax on the amount withdrawn, just as you would with a 401(k).

Additional Eligibility Requirements

To be eligible for an HSA, there are a few additional requirements beyond being covered by an HDHP or the HSA MEC plan that should be noted:

• You aren’t covered by another plan such as Medicare, Medicaid, TRICARE, or TRICARE For Life.
• You haven’t used VA health benefits within the last three months (other than for screening or disregarded services.).
• You’re not eligible to be claimed as a dependent on someone else’s tax return.

But if none of the above applies to you, then what are you waiting for? Get your HSA started!

2. Contribute!

Now that you’ve got your HSA set up and ready to go, start putting in as much money as possible!

HSAs allow you to save money without restrictions based on your income. This is particularly important for those in higher tax brackets, as contributing to an HSA will reduce your taxable income.

Every dollar you put into your account is a dollar less of income you need to pay tax on.

In Colorado, the maximum HSA contribution limit for 2024 is $4,150 for an individual and $8,300 for a family plan.

If you’re over the age of 55, you can contribute an additional $1,000.

As an added bonus, these contributions are considered an “above-the-line” deduction. You can take the standard deduction, and don’t have to itemize.

3. Invest

HSAs don’t limit you to the anemic returns of cash and money market accounts.

Yes, these are safe and stable. But in the long run, they typically don’t keep up with inflation.

If you’re in good health and willing to take a little more risk, you may be able to get a better return over time by investing your HSA in assets such as stocks, bonds, and mutual funds.

Note: It’s a good idea to spread your investments across multiple asset classes, as this tends to yield the best results over time. And, it’s always a good idea to keep a little cash available in case you need to withdraw some to cover medical expenses.

Keep in mind there may be fees involved, such as account maintenance and investment fees. So you may want to talk to a qualified investment professional for more personalized advice.

4. Be Patient

There’s no deadline or law that says your distributions need to be taken in the same year as the medical expense.

Save all your invoices and receipts. But consider using other money to pay those healthcare bills at the time. Then just leave the money in your HSA to accumulate tax-deferred as long as you can.

The longer your money stays in your HSA account accumulating, the more you’ll have later as a retirement asset. There are no required distributions like traditional IRAs. You can let your HSA compound even past age 72 and as long as you live, if you like.

For example: you could pay $5,000 for your child’s orthodontic work. Then years later, when you may be in a much higher tax bracket, you can withdraw $5,000 from the HSA. tax-free, and spend it on other costs, such as college tuition, or other retirement costs.

If the IRS wants to challenge your transaction, well, that’s why you kept your receipts!

Generally, when assets are growing tax deferred, you should be in no hurry to withdraw them and pay taxes on the income. Be patient, and let your HSA money compound for as long as you can.

The flexibility of this account is one of its greatest advantages!

5. Use Your HSA Account to Buy OTC Medications

Prior to 2020, you could not use an HSA to buy over-the-counter (OTC) medications.

But the CARES Act of 2020 included provisions that now allow HSAs to cover OTC medications and feminine hygiene products.

You can find a detailed list of everything that is considered an eligible expense in the IRS Publication 502.

Business Owners and Independent Contractors: Now You can Combine Health Sharing and an HSA Account!

Health sharing plans are an affordable alternative to traditional insurance.

The monthly costs are typically about 50% less than the cost of unsubsidized health insurance. But they can be great options for people who are in good health and don’t have any pre-existing conditions. Especially if you don’t qualify for an Obamacare subsidy!

Health sharing plans are also much better than traditional health insurance at  letting you choose your own doctors and providers.

On their own, health sharing plans are not compatible with HSA accounts because they are not considered insurance products. However, there’s an excellent workaround that’s easy and affordable for anyone who is self-employed or owns their own business: add HSA MEC to a health sharing plan!