What Is An HSA And Why Should I Use One?

Maura Schauss |

By Maura Schauss, CFP®

Did you know that the average medical bill for a heart attack is $20,246?[1] With a number this staggering, it’s no wonder people are more afraid of healthcare costs than sickness.[2] 

Thankfully, there are many ways to plan for rising healthcare costs—the most popular option being a Health Savings Account (HSA). An HSA is a type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses.[3] It’s used in conjunction with a high-deductible health insurance plan.

Tax Advantages of An HSA

Using an HSA has three major tax advantages:

  1. You make pre-tax contributions. (This lowers your total tax liability at the end of the year.)

  2. You make tax-free withdrawals for qualified medical expenses.

  3. Your funds grow tax-free.

As long as you use an HSA for its intended purposes, you never pay taxes on the money in the account. (Think of it as a tax-free trust for your health.) The only time you may be subject to taxes or fees is if you contribute more than the maximum yearly amount or use the funds for non-qualified expenses.

Why You Should Use An HSA

Aside from HSAs being tax-free in every sense of the word, there are a few more reasons why you should set one up.

  1. Many employers offer HSA contribution matches. Similar to a 401(k) contribution match, if your employer matches $500 per year, for example, you can also contribute $500 and see a 100% return on your money. 

  2. Your HSA funds roll over year-to-year.  Unlike Flexible Spending Accounts (FSAs), your HSA funds stay with you indefinitely, even if you switch jobs or no longer have a high-deductible health plan. These funds have no expiration date.

  3. It’s an efficient way to fund healthcare costs in retirement.  You can invest your HSA money in ETFs or mutual funds once you have a certain amount in your account—usually around $2,000. If you choose to invest your HSA funds instead of using them for day-to-day healthcare expenses, you can build your own separate “healthcare” nest egg for retirement.

HSA Eligibility

To qualify for an HSA, you must meet the following requirements:[4]

  1. You are covered under a high-deductible health plan.

  2. You have no other healthcare coverage.

  3. You are not enrolled in Medicare.

  4. You are not claimed as a dependent on someone else’s tax return.

The contribution limits for 2019 are $3,500 for self-only plans and $7,000 for family plans.[5] If you’re age 55 or older, you can make an extra $1,000 per year in catch-up contributions. You can use funds from your HSA at any time, but you can only make contributions while you’re enrolled in a high-deductible health insurance plan. 

The Bottom Line

Out of all retirement worries, 41% of Americans are most worried about healthcare costs.[6] A Health Savings Account is a great way to alleviate this stress as you prepare for those golden years. But before you set up your HSA, meet with a knowledgeable financial advisor who can help you maximize its benefits for retirement. At Washington Wealth Advisors, we’d be happy to walk you through this strategy and show you how to use it in the most tax-efficient way. To get started, schedule a meeting with Maura.   

About Washington Wealth Advisors

Washington Wealth Advisors is an independent registered investment advisory firm serving high net worth families and small businesses. We focus on holistic financial planning and comprehensive investment management. Leveraging our core strengths of unbiased, active investment management together with a detailed annual financial planning capability, we serve your comprehensive investment and financial planning needs.