Balancing Saving and Spending with an HSA

Learning about how to save and how to spend with your health savings account (HSA) can be a seriously powerful ally for your future. Here's how to do it.
by Shannan Seely July 11, 2019
Did you know that if you were approaching retirement in 1950, your chance to turn 69 years old was highly unlikely? Lots has changed since then, including but not limited to the fact that you can save with a health savings account in the year 2019… a pretty serious, and awesome, change from 1950! After all, the average life expectancy back then was 68 years old. Lucky for us, reaching age 90 today is not uncommon. In fact, the average American could expect to reach 78.6 years of age in 2017, according to the Centers for Disease Control and Prevention’s National Center for Health Statistics, which we think is pretty great news! But as we get older, we’re more likely to face health problems related to aging. As our age increases, so do our medical costs. It’s inevitable.
If you’re enrolled in a Health Savings Account (HSA), you need to think about how you’re saving versus spending your HSA funds. Here’s what you need to know.

Use Your HSA to Invest in Your Health

Depending on your stage of life, you may find that you cannot afford to pay for all of your health care expenses without tapping into your HSA. And that’s okay. Investing in your health should be your highest priority. But one advantage of a high-deductible healthcare plan (HDHP), a prerequisite for owning an HSA, is having lower monthly premiums. Thus, you can put more money into an HSA, tax-free, in order to build up a fund for your medical costs. So, even if you don’t need to use your HSA for health care expenses right now, consider the benefits of saving that money as something of a long-term wellness strategy.  

Use Your HSA to Grow Your Retirement Savings

If you’re in a higher income bracket, you may be looking for ways to reduce your taxable income. If this is true for you, you’ll appreciate the ability to exclude up to $7,000 per year from taxes for family coverage (plus another $1,000 if you’re 55 or older) or up to $3,500 for an individual. And you’ll earn this tax-free benefit even if you spend the entire amount each year.  Remember: this a health savings account. If you don’t spend the money, it’s yours to keep and rolls over year after year for when you do eventually need it. And don’t rely solely on HSA for retirement savings. Financial planners recommend you consider several investment tools, including:  
  • A 401(k), which is a retirement savings plan sponsored by an employer. The plan allows workers to save and invest a piece of their paycheck before taxes are taken out. 
  • A Roth IRA, or “individual retirement account” allowing a person to set aside after-tax income up to a specified amount each year. The account’s earnings and withdrawals are tax-free after age 59½.
  • A health flexible spending account (FSA), also a part of your job benefits package. The plan lets you use pre-tax dollars to pay for eligible health care expenses for you, your spouse, and your eligible dependents. But keep in mind that if you already have an HSA, you can use your FSA for limited purposes, e.g. dental, vision, and some other eligible expenses (but not medical or prescription drugs).

Use Your HSA for Unforeseen Medical Expenses Before Retirement

Those without an adequate emergency fund may find themselves in financial trouble during a health crisis. A large medical expense may lead to early withdrawals of 401(k)s, which means additional tax and early withdrawal penalties (and nobody wants that).
By planning ahead, you could build a health care emergency fund in your HSA, offering you peace of mind with the knowledge that funds are readily available for unexpected medical expenses.

Use Your HSA for Healthcare Costs After Retirement

Healthcare is one of the largest expenses in retirement. According to the Kaiser Family Foundation, the percentage of household budgets spent on health expenses is nearly 3 times as much for retirees on Medicare as for working households (14% versus 5%). Spending your tax-free funds instead of that taxable 401(k) or IRA distribution can make a significant difference for retirees on a tight budget. If you find yourself healthy and happy in your golden years (yay!), you can also withdraw HSA funds for any purpose without penalty after age 65. Note: If you withdraw funds from your HSA for non-eligible expenses prior to age 65, taxes may be applicable to the withdrawn amount, plus an additional 20% penalty from the IRS. Yikes. So be aware!

Save with a Health Savings Account

HSA rules allow funds to carry over indefinitely with the triple tax-benefit of contributing tax-free, growing tax-free, and withdrawing tax-free for qualified medical expenses. If you can afford to, why wouldn’t you choose to save and maximize your HSA every year? … Yeah, that’s what we thought. 

Take the first step
in taking care of you.