Make the Most of Your Health Saving Account

Once, I was talking with several friends and one of them mentioned Health savings accounts (HSAs), and said he contributes $1000 total to cover the year’s expenses. I was surprised and even surprised when several other people were doing the same. I understand we are still relatively young and don’t have much medical expenses yet. However, it reflects a fact that lots of people don’t understand the HSA even though they are highly educated (most of them have a PhD like me). So, I think maybe it is good to write something about it. 

So, what’s HSA? 

HSA is a savings account where you can contribute pre-tax money for qualified medical expenses. You can use HSA to pay for deductibles, copayments, coinsurance, and other expenses. To be eligible for an HSA, you must have a high-deductible health plan (HDHP). An HDHP is a health insurance plan with a higher deductible than traditional plans. While it might sound intimidating, it’s a strategic choice that often comes with lower monthly premiums, making it a cost-effective option for many individuals and families.

HAS offers triple tax advantages

• Contribution is tax free. Since the contribution is pre-tax money, it has a tax advantage and your contribution lowers your taxable income. 
• Investment growth is tax free. Money in the HSA can be invested and all the investment returns (gains) will not be taxed. 
• Withdraw for medical expenses is tax free. When you withdraw your money from HAS for qualified medical expenses, you don’t need to pay tax.

Because of these tax advantages, HAS provides more tax advantages than retirement accounts, such as 401ks or IRAs. Also, starting at age 65, there is no penalty for using HSA money for non-qualified medical expenses. If you let the money compound in the account for a long time, you can build wealth through the compound effect.

HSA has a contribution limit. Each year, the IRS sets a contribution limit.  In 2023, you can contribute up to $3,850 if the coverage is just for yourself or $7,750 if you have coverage for your family. At age 55, individuals can contribute an additional $1,000. For 2024, the contribution limits $4,150 for self-only coverage and $8,300 for family coverage. Those 55 and older can contribute an additional $1,000 as a catch-up contribution.

You may get an employer contribution too. Depending on the benefit of your company, your employer may contribute too. For instance, my employer contributes $1,000 every year to the family plan.

You can invest a portion of the HSA fund in the market. There is an investment threshold, and any money above the threshold can be invested. In my HSA, the threshold is $2,000. The money can be invested in different funds depending on the investment option provided by your HAS.

I always maximize the contribution limit and invest in an index fund for the money above the threshold. Once the money is invested, I don’t plan to take it out till 65. 

HSA offers many benefits and can be used as an investing vehicle for building wealth.