How to Use HSAs for Tax-Advantaged Savings, Investments

HSAs are increasingly coming into use. They are a more tax-efficient means of investing, withdrawing money to cover large healthcare expenses, or simply preparing for higher medical costs in one’s later years.

HSAs don’t have required minimum distributions like 401k or IRA plans. They have become more prevalent in recent years due to their tax advantages. Also, unlike flexible savings accounts, HSA balances generally roll over each year without a use-it-or-lose-it provision.

Assets in HSAs grew to over $116 billion held across 36 million accounts in 2023. This represents a 500% increase since 2013, according to the Consumer Financial Protection Bureau. This growth occurred as more consumers enrolled in high deductible health plans (a requirement to open an HSA), a May report by CFPB showed.

“If you have an employer who provides a qualified high deductible health plan, then you can also contribute to an HSA,” Chloé A. Moore, founder and principal of Atlanta-based Financial Staples, said in an interview.

“Typically, your employer would provide an HSA account for you, or set it up for you. During open enrollment, there’s typically an option to open an HSA. Some companies are providing a match, or some level of contribution, as an incentive to set up an HSA plan,” Moore added.

Triple Tax Advantage

One of the biggest draws for opening an HSA is the “triple tax advantage,” she noted.

“Any contributions you make to an HSA are pre-taxed. This reduces your taxable income. The fund also grows tax free, and any withdrawals you make for qualified health expenses are tax free,” Moore explained.

“Similar to a 401k, if you change employers that account comes with you. You still have access to that money. You can keep the account with whatever bank or institution you had it with, or you could combine it with a new employer’s plan and just roll it over,” Moore said.

She has seen more people using HSAs. Often, she discusses whether these savings accounts would be worthwhile for clients when reviewing their benefits during open enrollment periods.

“We do the math and see how an HSA could make a difference. That helps people to know that it’s not scary,” she explained. She noted that some individuals worry about the impact of high deductible health plans on their finances.

“If you are a high earner and you have excess cash flow, you can always just let that money accumulate in the HSA to invest it. You typically have to keep around $2,000 minimum in cash in the HSA,” she noted.

“If you have the cash flow to max it out every year, in 10 or 20 years you could have a good nest egg to use for retirement expenses or just later on in life,” Moore said.

Contribution Limits for HSAs

The IRS has HSA contribution limits. The limits for this year are $4,150 for individuals and $8,300 for family coverage under a high deductible health plan.

The IRS defines a high deductible health plan as “a health plan with an annual deductible that is not less than $1,600 for self-only coverage or $3,200 for family coverage, and for which the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $8,050 for self-only coverage or $16,100 for family coverage.”

Aaron Clarke, a wealth advisor at Gainesville, Virginia-based Heritage Financial, noted that self-employed workers and freelancers, who don’t have access to employer-sponsored HSAs, can also benefit from these savings accounts.

That’s because high deductible health plans offered on federal or state health insurance marketplaces would also be eligible for HSAs, he explained.

“It applies the same for them as every other taxpayer,” Clarke said. Individuals shopping for insurance on marketplaces should make note that not every high deductible plan is labeled as such – so they may have more options than they initially think to access HSAs.

“A high deductible health plan you pick can qualify (for an HSA) even if it isn’t labeled as such. All you need to do is know what the current IRS limit is for the high deductible plan…and the out of pocket maximum,” Clarke said.

“Once you’re on that healthcare plan, you can go to an independent HSA provider and open an account.”