Invest Retirement

Am I Using My HSA Money The Way I Should Be?

Lindsay Tigar  |  March 21, 2022

If you can do it, it’s time to max this account out. Here’s how to manage it in order to get the most out of it.

While many people are familiar with the basics of their Health Savings Account (HSA) to cover medical expenses throughout our lifetime, did you also know it’s a super-savvy way to stow away cash for retirement? Unlike other investment vehicles that are taxed at various points in our lifecycle, your HSA money is always your money — tax-free! The genius of using an HSA is that you save your money pre-tax, invest it tax-free, and even withdraw it tax-free for eligible healthcare expenses, explains certified financial planner Stephen Kates

Here’s a look at a few of our favorite strategies + advice from experts on how to get the most out of your HSA.  

Invest your HSA funds like you would invest funds in your IRA or 401(k) 

When you think of your HSA, consider it another version of an IRA or a 401K, says Roy Ramthun, known as “Mr. HSA,” and the founder and president of HSA Consulting Services. How come? With an HSA, you’ll pay no income tax (and in some cases, no payroll taxes) on your contributions to your HSA, and no taxes on the earnings or gains from investments in your HSA funds, either.  Not to mention, Ramthun adds, you pay zero taxes on your withdrawals from your HSA if you use that money to pay for — or reimburse yourself for — eligible health care expenses. Try to think of your HSA as a long-term part of your financial strategy — one that can help you avoid paying a single penny in taxes.

You Have Time: Let Your Account Grow 

There’s an essential difference between a healthcare-focused Flexible Spending Account (FSA) and an HSA: Your HSA rolls over, the FSA doesn’t. This means people with an FSA must “use it or lose it,” only put in the cash into the account that they know they’ll spend within the calendar year. HSAs don’t have this regulation, so you can invest up to the allotted dollar limit every single year until you’re ready to use it. “If your employer makes contributions to your account, those contributions are yours to use immediately and do not require a vesting period,” Kates explains. “This means if you move to a new employer that offers an HSA account, you can rollover your old account into your new one and keep contributing towards a single account.”

You may want to consider paying for your medical expenses out of your salary if you can, rather than pulling from your HSA. “Because there is no deadline to spend your money, you can let your balance build over time and wait to withdraw money later, such as in your retirement years,” Ramthun says.

He also recommends contributing the maximum every year if you can afford it, since it’s tax-free money. In 2021, the Internal Revenue Service’s contribution limits for an HSA are $3,600 for singles and $7,200 for families. Plus, once you’re 55 or older, you can add in another $1,000 per year. 

Save your medical receipts now and invest in future retirement lifestyle spending

As you collect and pay medical expenses throughout your life, keep a digital file of everything you paid. How come? Keeping your receipts and getting reimbursed is one of the best ways to utilize your HSA money, according to Matt Rinkey, chief financial life officer of Illumination Wealth. Rather than pulling money out of your HSA when a bill is due, you can pay it in real-time, with money from your checking account, and then be reimbursed for it later — decades later. (Yes, this is perfectly fine. There’s no deadline on when you need to get reimbursed for a qualified expense.). “Let’s say that in 2021 you had an out-of-pocket medical cost of $5,000. Instead of using $5,000 of your HSA money, you let it grow for 15 years, and that $5,000 turns into $13,000,” he continues. “In retirement, you then find yourself wanting to travel to Europe, simply reimburse yourself the $5,000 cost from 2021, pay for the trip, and your HSA account will still have $8,000 in it.” 

Do a one-time transfer from an IRA to an HSA

As Rinkey explains, the tax code allows you to make a one-time rollover from a Traditional IRA to an HSA, transforming your tax-deferred retirement savings into an account you can access tax-free. “Performing a proper rollover is a way to move money that would have been taxable when withdrawn from the Traditional IRA and let you access it tax-free for qualified medical expenses in the future,” he explains. 

It’s important to note that you can only do this if you are eligible to make a new HSA contribution — meaning you must have a qualifying health insurance plan in place. And you can only roll over up to that year’s annual maximum, and you can only do this once in your lifetime, so you need to be strategic about it. “Typically, it’s better to contribute new money to your HSA rather than the rollover, but in certain circumstances, this can improve your retirement savings by converting taxable money to otherwise tax-free forever money for your future medical costs,” he shares.

Pay for long-term care premiums with your HSA

As the life expectancy in the United States grows, so does the cost of long-term care at assisted living facilities, or the cost of a live-in nurse. You can cut down on those foreseeable expenses with an HSA since it can be used to cover part of the cost for a ‘tax-qualified’ long-term care insurance policy, according to Brian Walsh, Jr., a senior financial advisor at Walsh & Nicholson Financial Group. “You can do this at any age, but the amount you can use increases as you get older,” he says. “Long-term care premiums can be expensive and make many pre-retirees avoid getting these much-needed policies. By allocating a portion of your money to an HSA, you can build a pot of money that will be able to produce the payments needed to meet your premium each year.”


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