HSAs: Spend it or Save it?

By: Brandon Clark, CPA


Do you have a Health Savings Plan (HSA) through work? These are available to people whose health insurance is a high deductible plan – and can be a great short or long-term part of your plan. What’s so great about them?

1.) HSAs are more useful that a “use it or lose it” healthcare Flexible Spending Account (FSA) available at many workplaces. HSA account balances can be saved for later use in your life – the money is yours forever, and you can leave it to your children.

2.) You can contribute more to an HSA, and you can invest the account for long-term growth if you wish.

3.) HSA accounts have the most tax benefits of any type of savings or investment. 

Want to learn more about how you can take maximum advantage of these powerful accounts? 

Tax Benefits

HSA accounts are tax superstars! They offer three different tax benefits:

  • Pre-tax Contributions – HSA contributions are subtracted from your income on your tax return.
  • Tax-free growth – You wont get a tax bill while the account is growing.  
  • Tax-free distributions – When you withdraw funds for qualified medical expenses (most normal medical costs, including long-term care insurance premiums) you receive those funds TAX-FREE.

If you take money out for non-medical costs, you will have to pay taxes on the withdrawal (like from an IRA). If you are under age 65, there may be penalties also. 

Contribution Limits:

As of 2022:

  • Single $3,650
  • Family $7,300
  • Over age 50, catch up bonus contributions $1,000
It can be a powerful strategy to contribute the full amount each year, investing your contributions and leaving the account to grow!

Why HSAs are beneficial in retirement

HSAs are a great opportunity for increasing your retirement assets. It is very beneficial to have well-funded HSAs to pay for your medical costs tax-free! Many HSAs have a wide array of investment options like IRAs, allowing you to invest them for use in your 70s and 80s. 

In addition to medical expenses more commonly thought of as eligible expenses (doctor visits, copays, prescriptions, etc.), HSAs can be used for long-term care insurance premiums (up to the allowable limit determined by age) and Medicare premiums (Parts B, D and Medicare advantage plans). 

Should you spend funds from your HSA before retirement?

Great question – Let’s think of your options:

1.) Spend your HSA now if you don’t have the funds you need to pay for your medical care, and you would have to go into debt to cover them. If you are able to save even part of each year’s contribution it will help you prepare for retirement.

2.) Save and invest your HSA if you can pay your medical costs out of current income or savings. The long-term benefits are worth it!

3.) If you get into a tough position, you can use some of your HSA for expenses incurred in a previous tax year, as long as you have the receipts. This can be a helpful option in case you are facing lots of expenses and struggling to find the funds. 

Get help and advice! This sort of issue is one that we commonly discuss with our clients at Toler Financial Group – it can be challenging to prioritize your options in a complicated situation. HSA accounts can be a powerful and flexible tool to help you build a strong retirement.