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8 Ways to Use Your Health Savings Account

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A senior couple looking at how much money they have saved in their health savings account (HSA).

A health savings account (HSA) is a tax-advantaged medical savings account available to U.S. taxpayers enrolled in a high-deductible health plan (HDHP). The primary purpose of an HSA is to assist these individuals in paying for out-of-pocket medical expenses. HSAs are particularly beneficial for individuals with high healthcare needs, self-employed individuals, and those who wish to save for future medical expenses in a tax-efficient manner. An HSA is not just a storage for your funds, but it is also an investment tool that can help you pay for other financial needs. Here’s how you can use an HSA to benefit your finances.

You may want to talk to a financial advisor to create a comprehensive financial plan that can focus on building wealth and saving for retirement.

1. You Can Reduce Your Tax Liability

One of the key benefits of an HSA is that it allows you to reduce your tax liability. HSA contributions are tax-deductible, meaning they reduce your taxable income. For example, if you’re in the 24% tax bracket and contribute $3,000 to your HSA, you could save $720 on your taxes for that year (24% of $3,000). This tax-saving aspect of HSAs is what makes them a powerful financial tool for many individuals and families. 

You don’t have to do much to earn this benefit other than opening an HSA and funding it. The more you contribute to your HSA each year, the more tax money you’ll potentially save. Maximizing those funds should also include a plan for how to spend those funds and take advantage of the tax savings.

2. Earn an Employer HSA Contribution

Many employers match employee contributions to an HSA, effectively doubling your savings. This is a significant incentive for employees to contribute to their HSAs, thereby increasing the financial resources available to them for healthcare needs. However, not all employers offer this benefit, so it would be prudent to check with your employer for specific details.

Employer matching contributions aren’t included in your taxable income, so you won’t owe any taxes on them. On top of that, HSA funds grow without being subject to tax, and withdrawals for qualified medical expenses are also tax-free. This triple tax advantage boosts the value of these accounts.

3. Increase Your Spending Power

Since HSA contributions are tax-deductible, every dollar contributed is a dollar saved. This effectively increases your spending power because you keep 100% of every dollar you contribute, unlike a traditional savings account where your money gets taxed.

To take advantage of this tax benefit, you’ll want to maximize the use of your funds. This means saving in high-yield savings accounts or investing in a variety of accounts that can help you earn a better return than just keeping the money in your normal bank account.

4. Save for Health Emergencies

A senior researching different ways to use his health savings account (HSA).

An HSA is an excellent way to save for unexpected health emergencies. First, the funds of an HSA roll over from year to year. Therefore, allowing you to save long-term and take advantage of investment growth.

Second, HSAs are portable, which means that they are not tied to a specific employer. So it provides individuals with continuous access to funds, even after they change jobs. This flexibility makes it easier for you to cover healthcare costs now and save for potential health emergencies down the road.

5. Get Lower Health Premiums

High-deductible health plans, which qualify you to open an HSA, usually have lower premiums than traditional health plans. This difference in premiums can result in savings over a year but it might be helpful to compare the cost of different health plans and verify the potential savings for yourself.

However, you should take note that while HSAs can lead to lower premiums, they also have potential downsides or risks. For one thing, these plans could include higher out-of-pocket costs before the deductible is met.

6. Delay Reimbursements

Some people opt to pay for medical expenses out of pocket and save their HSA funds for future use, even delaying reimbursements from their account. This allows those HSA funds to grow tax-free over time and potentially lead to more money available to cover future medical expenses.

But while paying out-of-pocket now and reimbursing from an HSA later could result in future gains, this strategy is not a one-size-fits-all. So you need to consider how it will impact your finances.

7. Gift Health Savings to Beneficiaries

HSA funds can be transferred to a spouse or another beneficiary should the account holder pass away. The legal framework for this strategy is outlined in Section 223 of the U.S. Tax Code. HSAs are tax-advantaged, meaning that contributions, earnings and withdrawals for qualified medical expenses are all tax-free. This provides added flexibility, as the funds can be used for the beneficiary’s qualifying medical expenses, tax-free.

8. Invest Your Funds

Some providers allow HSA holders to invest their funds, similar to how you would with a 401(k) or IRA. These can be in a variety of investments, including stocks, bonds or mutual funds. In doing so, your HSA not only functions as a savings account, but also as a vehicle to grow your wealth. But, as with other investments, consider your financial situation and risk tolerance before investing.

Bottom Line

A man looking at how much money he has in his health savings account (HSA) to pay for medical expenses.

A health savings account (HSA) can help you save money in a tax-advantaged way. But, not only can you save funds to pay for future medical expenses, you can also leverage this account in other financial planning ways. From reducing your tax liability and increasing your spending power to securing lower health premiums.

Tips for Investing

  • A financial advisor can help you find strategic ways to use your HSA to build wealth or save money to cover medical expenses. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you want to see how much your invested money will grow over time, SmartAsset’s free investment calculator will help you get an estimate.

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