Health Savings Accounts (HSAs) – What do I need to know?

November 15, 2019

Dating back to the early 2000s, Health Savings Accounts (HSAs) have become a popular strategy for paying for medical expenses. HSAs are tax-advantaged medical savings accounts available to those enrolled in high-deductible health plans (HDHPs). With rising medical expenses as well as the considerable challenges that the Medicare program is facing, medical expenses will continue to have a major impact on every American’s budget, making HSAs particularly attractive. (Please note that the HDHP/HSA combo may not be the right avenue for your family if you tend to have high out-of-pocket health care expenses.)

Let’s look at some of the advantages that an HSA provides:

HSAs provide a triple tax benefit 

  1. Your contributions are tax deductible if you contribute to an HSA through your paycheck.
  2. Contributions can be invested based on options available to you in your plan and any earnings are tax free.
  3. If withdrawals are used for qualified medical expenses for you, your spouse or your dependents, they are also tax free. The preferential tax treatment of HSAs is among the best available in the current tax code!

There is no “use it or lose it” with HSAs

Sometimes HSAs can be confused with FSAs (Flex Spending Accounts). Unlike FSAs, an HSA allows unused funds to be carried over year after year. Additionally, employer-sponsored plans can offer an incentive by contributing to your HSA on your behalf. It’s like getting free money! If you leave that employer, your HSA is “portable,” meaning it will stay with you. Be sure to check with your benefits administrator on specific rollover rules.

You can start saving for the future

Saving for medical expenses should be viewed as a critical part of saving for retirement. A study by the Employee Benefits Research Institute found that some couples would need to save almost $350,000 to cover medical expenses during retirement! With an HSA you can build a medical expense “nest egg” that complements your traditional retirement savings. If you have extra cash, you may consider starting to fund an HSA and/or increase your contributions to your HSA. There are limits to how much may be contributed to your HSA each year; the upcoming 2020 maximum annual contribution limits will be $3,550 for individuals and $7,100 for families which are slight increases from the 2019 maximums of $3,500 and $7,000, respectively. If you are age 55 or older, you can contribute an extra $1,000. Note that all contributions made by you, your employer, or someone on your behalf count towards these limits, but there are no income limits to be eligible to contribute to an HSA.

You can still use HSA money after you are eligible for Medicare

When you enroll in Medicare, you can no longer contribute to an HSA since Medicare is not a HDHP. However, you may continue to use the HSA money to pay for qualified medical expenses and can enjoy expanded benefits. For example, you can use the tax-free money from an HSA to continue to pay for out-of-pocket medical costs including Medicare premiums (except for Medigap premiums).

You have options

You always have the option to withdraw money from your HSA for any reason; however, there may be consequences if not used for qualified medical expenses. Typically, if the money is not used for qualified medical expenses AND you are not yet age 65, you will be subject to a 20% penalty and any earnings would be taxable. The good news is if you are over 65 and you use HSA money to pay for something which is not medical-related, although it will be taxable, the 20% penalty is waived.

With the near extinction of high paying pension plans in retirement, rising medical costs, and longer life expectancies, contributing to an employer retirement plan may not be enough for a financially healthy retirement. If you have extra cash and you think that an HSA may be a good option for you, consider allocating some of your cash to an HSA to complement your retirement savings. Please note while there are benefits to HSAs, their rules are complex. To maximize your HSA benefits and to avoid costly mistakes, give one of our CFP® professionals a call.


CCMI provides personalized fee-only financial planning and investment management services to business owners, professionals, individuals and families in San Diego and throughout the country.  CCMI has a team of CERTIFIED FINANCIAL PLANNERTM professionals who act as fiduciaries, which means our clients’ interests always come first.
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