An Interesting Take on HSAs

I may be the first person to get financial advice at a party and actually end up using it.

On New Year’s Eve, someone brought up Health Savings Accounts to me:

• “Don’t spend your HSA”
• “I know I can’t spend it on non-medical expenses, but I’ll still use it for doctor’s visits with the tax free money.”
• “Oh you haven’t heard how to actually use an HSA?”
• “Say more…”

He did. And it turns out, many others have written about how to actually use an HSA.

And it comes down to taxes.

They want us to save for retirement, so they offer tax breaks for using 401(k)s and IRAs.

They want us to have money saved for health expenses, so they give tax breaks for HSAs.

But unlike the Roth vs After-Tax battles in the retirement space, the HSA is the triple threat.

It is the only investment vehicle that:

1. Reduces your taxable income when you put money in
2. Grows your money tax free
3. Leaves tax free when you need it

The standard pitch of the HSA is:

1. You contribute to it each year (Your employer may also match your contributions like a 401(k))
2. You invest what you put in
3. When you need the money for health expenses, sell the investment, and use the money

Here’s where the other strategy kicks in.

Instead of using it to pay for current medical expenses, keep your money in the HSA.

For your current medical bills, pay them with your normal checking account.

By paying with your checking account now, you give your money more time to potentially grow in the market.

Years and years of tax-free compounding can grow into quite the large nest egg.

That was new to me.

Now, once you have this tax-advantaged nest egg, you’ve got options:

​

1.Use it for Health-Related Expenses

Most people’s healthcare expenses go up with age.

With this approach, you’ll have had decades of investment returns ready to help you pay for those increased expenses.

For example: Today, you might be able to afford a $250 annual physical on your own using your checking account. By doing this, you’d keep an extra $250 in your HSA each year invested. Do that for 30 years and it could be worth $28,000 of tax-free, inflation-adjusted dollars.

With this approach, you are forcing young and healthy you to save for the potentially less healthy and more expensive future you.

2.Use it for Retirement

But what if you stay healthy?

Well, once you hit age 65, you can withdraw HSA funds for non-medical expenses. It basically acts as a traditional IRA.

You will pay ordinary income tax when you withdraw the money, but since you got both the initial tax reduction and tax-free growth, it was still better than a brokerage account.

And, even after 65, medical related expenses are still completely tax-free.

​

3.Reimburse Yourself Later

A concern with this “long-term HSA” strategy is:

Thankfully, there’s a solution: The IRS doesn’t limit when you reimburse qualified medical expenses.

Stick with me here.

For example, say your employer deposits $1,000 annually into your HSA and you spend $1,000 per year on medical bills starting in 2025 (doctor’s visits, prescriptions, etc.).

You pay it from your checking account like we discuss above.

Then, in 2035, you want cash for a big vacation.

If you’ve kept your receipts, you can withdraw $10,000 from your HSA in 2035 as a tax-free reimbursement from all 10 years of medical expenses.

If your HSA or the IRS ever asks for proof of the expense, you show any of the receipts from the last 10 years of medical history.

This way, you’ve gained 10 years of tax-free growth on expenses you originally paid out of pocket.

You aren’t locking away HSA funds forever, you’re allowing them to grow tax-free until you choose to reimburse yourself later.

People complain the tax system is too complicated.

This is probably an example of that.

BUT, depending on where you are with money, here are three options for you to consider this week:

1. Beginner: If you’ve never heard of an HSA: Go to your HR portal and see if you have access to one. If you do, set it up and take advantage of your employer match. It’s free money.
2. Intermediate: If you already contribute to an HSA: Make sure you are investing the money from the HSA (like Index funds or ETFs). If you can, start paying for small medical bills from your checking account
3. Advanced: What would it look like for you to start maxing out your HSA each year?

All of this content is for educational purposes only and should not be taken as financial or investment advice. Any mention of securities is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned.