3 Ways to Get the Most Out of Your HSA

Doctor talking to older patient.

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Maximizing the tax benefits of your HSA is easy with these three steps.


Key points

  • Build your healthcare nest egg by maxing out your annual contribution.
  • Let that money grow by paying expenses out of pocket in early years.
  • Save your receipts to be reimbursed down the road.

A health savings account, or HSA, represents one of the rare triple tax-advantaged savings accounts available to many Americans. Those who qualify can deduct annual contributions, invest on a tax-deferred basis, and reimburse themselves for qualified distributions tax free. Find out how to get the most bang for your buck from your HSA with these three tips.

1. Contribute the right amount for your situation

The first step toward saving in an HSA is making sure you are eligible for an account. The best indicator of your eligibility is your annual deductible. Typically, if you have a deductible in the thousands of dollars, there’s a good chance you’re covered by a high-deductible health plan (HDHP).

In 2022, the minimum deductible for an individual HSA is $ 1,400 and for a family is $ 2,800. The maximum out-of-pocket costs are $ 7,050 for individuals and $ 14,100 for families.

Those covered under an HDHP are generally eligible for an HSA, as long as they meet the following requirements:

  • They are not covered by any other health insurance plan, including Medicare.
  • They are not claimed as a dependent on someone else’s tax return.
  • They do not have a flexible spending account or a health reimbursement account.

The maximum you can contribute to an HSA depends on the type of coverage. For individual coverage, an HSA can be funded with $ 3,650 in 2022. Family coverage doubles this amount to $ 7,300 in 2022. Those 55 and older can contribute an additional $ 1,000 annually to their HSA. These limits are set by the IRS and adjusted annually for inflation.

2. Let it grow

The next step is to invest the balance and leave it alone. How you can invest your HSA largely depends on the financial institution that holds it. If you open an HSA through a bank, you may be limited to earning interest on the value of the account. However, brokers that offer HSAs typically allow the accounts to be invested in stocks, bonds, and ETFs. The investment of an HSA should closely follow one’s risk tolerance and the need for HSA funds in the short term. Those who can’t afford to leave the HSA balance untouched should consider low-risk investments.

If you can afford to leave your HSA alone, consider doing so. A common strategy to allow these triple tax-advantaged accounts to grow is to pay healthcare expenses out of pocket whenever possible. By leaving an HSA untouched, the tax-deferred status of the account can allow for significant growth and the compounding of investment returns.

Looking to open an HSA? Check out our best online brokers.

3. Reimburse in retirement

The most important part, however, is to keep your receipts when you incur a health care expense. One of the hallmark features of an HSA is that there is no time limit on reimbursements. This means if you open an HSA at 20 and save all receipts for qualifying expenses until you are 65, you can reimburse the entire amount in retirement with the added benefit of 45 years of tax-free growth.

So what expenses are reimbursable? Generally, most non-cosmetic medical expenses are eligible for reimbursement from an HSA, including long-term care, vision expenses, and dental costs.

Notable expenses which are not eligible for HSA reimbursement include insurance premiums, over the counter toiletries, and cosmetic surgeries. For a comprehensive list of eligible and ineligible expenses, consult IRS Publication 502.

Keep in mind that HSA distributions depend on when you take them. If you are under 65, a non-qualified distribution will be hit with a 20% penalty and taxed as ordinary income. For those 65 and older, however, there is no 20% penalty, and distributions will simply be treated as ordinary income. Unlike 401 (k) s or IRAs, an HSA is not subject to required minimum distributions.

It’s worth checking if you qualify for an HSA. If you do, consider following these steps to get the most out of your money, which could be especially helpful in your retirement years.

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