Unlock the power of your health savings account (HSA): 5 hidden benefits you need to know

Imagine an account that offers not just one, not just two, but three tax advantages. Yes, it exists and it’s your health savings account (HSA). It’s the only account that exists that offers three potential tax benefits.

Despite such incredible benefits, surprisingly few people fully capitalize on this opportunity and almost 90% don’t take advantage of one of the greatest benefits available to them (which we will talk about below).

Why? Because navigating the world of health insurance and savings accounts can be challenging.

Our take is that while health insurance can be complicated, making smart decisions with your money doesn’t have to be.

Let’s dive into the world of HSAs and uncover some of the tips, tricks, and lesser-known strategies that can supercharge your money and help you pay less in taxes.

What is an HSA and how does it work?

Health Savings Accounts are more than just a place to before-tax money for medical bills. Here's a quick primer (you can find a more detailed discussion in our existing article on HSAs):

Eligibility: You must be enrolled in a high-deductible health plan (HDHP) to contribute to an HSA.

Contributions: Money you contribute is pre-tax, meaning it reduces your taxable income. For 2024, the contribution limits are $4,150 for individuals, $8,300 for families, and an extra $1,000 for those 55 and older.

Expenses: You can use HSA money tax-free for qualified medical expenses which includes everything from your deductible, copays and coinsurance, and any out-of-pocket costs not covered directly by your insurance company.

Triple tax benefits: If used properly, the money you put in is tax-free, it can grow tax-free, and the money can be used tax-free today or in the future.

While there are many benefits to an HSA, if you use HSA funds for non-qualified expenses before age 65, you’ll face both income taxes and a 20% penalty. After age 65, the penalty disappears, but income taxes still apply for non-medical use.

Let’s explore how you can make the most of your HSA.

5 tips and tricks to maximize your HSA

#1 - Don’t spend the money right away

This might seem a bit counterintuitive at first, but not spending the money you put into your HSA could be your best decision.

Why? Because unlike flexible spending accounts (FSAs) where you lose the money if you don’t spend it, money in your HSA is yours to keep for as long as you want. You can even use the money to cover health care costs decades down the road. And, yes, that money can still be used tax-free.

Quick point. If you need to use the money in your HSA for medical expenses, that’s usually the best decision. Don’t avoid using your HSA and have to dig into your emergency fund or go into debt to pay for medical expenses. Also, see trick #4 to learn how you can pay yourself back years down the road.

If not spending your HSA fits into your overall plan, then you need to combine it with the next trick we will cover.

#2 - Invest your HSA funds

Only about 10% of people with money in an HSA invest their money. Whether people plan on spending the money, don’t know they can invest it, or simply aren’t sure how to invest it, they are missing out on one of the greatest benefits an HSA can offer – tax-free growth.

So how do you invest your HSA? Pretty much all HSAs are different because different employers use different custodians (think of them like banks for your HSA) and all of this influences what you can invest in.

In general, HSAs are similar to your company retirement plan (i.e. 401k, 403b, etc.). They will offer a list of investment options that is often limited to 15 or so funds. Depending on what is available, choose a mix of stock and bond funds based on your risk tolerance and goals. Keep it simple and review your investments periodically to ensure they align with your long-term strategy.

#3 - Top off contributions after the year ends

Most people add money to their HSAs directly from their paycheck. But what happens if you don’t hit the maximum contribution limit between January 1 and December 31? Most people think they missed the boat, but not you (because you read this article).

The good news is that you can “top off” your contributions up until you file your tax returns for that year. So if you miss hitting the limit for a given year, you can add money to your HSA before April 15 (or earlier if you file your taxes before the deadline) and claim a tax write-off for the prior year.

Example: If your family HSA limit is $8,300 and you’ve only contributed $4,000 by December 31, you can contribute the remaining $4,300 before April 15 and claim the tax deduction for the prior year. You have to do this from your own savings and not your paycheck, but you still get the benefit of reducing your taxable income.

#4 - Reimburse yourself for past medical expenses (decades later)

This is a big one.

Money in your HSA can be used for a lot of things including:

• Out of pocket costs like deductibles, copays, coinsurance, and other qualified medical expenses.
• Medicare premiums.
• Long-term care insurance premiums and related costs.
• You can even use the money for a new air conditioner, a pool, home workout equipment, an in-home elevator, and general home improvements (you need what’s called a “letter of medical necessity” to qualify though).
• And the list goes on and on.

But here is the trick that most people don’t know about. You can use your HSA to reimburse yourself for medical expenses even if they occurred last year, 5 years ago, or even 20 years ago.

As long as you save your receipts and can prove the expense was qualified, you can reimburse yourself tax-free, even decades later.

Example: Let’s say you paid a $3,000 medical bill out of pocket this year. If you choose not to withdraw from your HSA now, you can keep your money growing in the account and decide to pay yourself back in 10 or 20 years—tax-free!

#5 - Use your HSA as retirement income

After you turn 65, your HSA can effectively function like a retirement account. You can withdraw funds for non-medical expenses without the 20% penalty (though you’ll owe income tax). This gives you flexibility in retirement to use the HSA for whatever you need—whether that’s health care costs or other living expenses.

The bottom line is that the HSA offers you a lot of flexibility in terms of how you use the money. And, if you are a really good planner, you can keep track of your medical bills over the years and simply reimburse yourself down the road and get the money out tax-free.

And with medical costs for a couple surpassing $300,000 in retirement, we can all use a little extra savings.

Bonus tips and tricks for your HSA

As if these 5 tricks aren’t enough, there are more ways to get the most out of an HSA:

• IRA to HSA rollover: You can do a one-time transfer from your traditional IRA to your HSA. It’s a once in a lifetime thing and annual contribution limits still apply. However, it could be a good way to get money out of an IRA, tax-free, and into your HSA.
• Extra catch-up contributions: If you and your spouse are both over 55 and you have your own accounts, you can both contribute an extra $1,000 to your HSAs. So instead of your contribution limit being $8,300 (for 2024), you can get up to $10,300 into your accounts.
• HSA for your adult children: If you have children over the age of 18 (and under the age of 26) that are covered under your family health plan but not counted as dependents on your tax return, they can set up an HSA and contribute the annual maximum as well.

Important note: All of these tricks have strict rules you need to follow to avoid taxes and penalties so make sure you know them or talk to a professional to avoid costly mistakes.

Making the most of your HSA

When it comes to health insurance, remember the #1 rule you need to follow – get the right insurance coverage first.

While an HSA is a very valuable tool, making sure you have the right coverage at the right cost for your situation is always the most important thing.

However, if a high-deductible plan with an HSA makes sense for you or your family, the HSA offers unmatched tax benefits and flexibility if you know how to use it.

And, if you use the tips and tricks we shared in this article, not only are you setting yourself up for success in the future and creating a potentially tax-free pot of money but you’re also putting yourself into an exclusive club of people that know how to get the most out of their HSAs.