By Eric Rosenberg, WCI ContributorA Health Savings Account (HSA) is a special type of savings and investment account designed to help you save for healthcare-related expenses. When used as intended, an HSA account offers arguably the best tax advantages of any type of account in your portfolio. But there’s a secret trick that can maximize the value of an HSA for your finance as you get older. Keep reading to learn more about how an HSA works and how to get the best results from it.
What Is an HSA Account?
A health savings account is a tax-advantaged savings and investment account for healthcare expenses. When you have a qualifying health insurance policy, you can contribute to an HSA annually with tax-deductible contributions, meaning you don’t pay any taxes on the contributions when they're made. This is similar to how a 401(k) or a traditional IRA contribution work (which is why we sometimes refer to an HSA as a Stealth IRA). Every qualifying dollar you add this year also lowers your tax bill this year since the money for the HSA is taken out of your paycheck pre-tax.
Plus, unlike a Flexible Spending Account (FSA), which you also could use for healthcare expenses, there's no use-it-or-lose-it policy at year's end. If you have leftover money in your HSA, you can roll that over from year to year.
But the benefits don’t stop there. Withdrawals are also tax-free when you use funds in the account for eligible healthcare expenses (you can also use the HSA funds for non-medical expenses after retirement age, but then you'd have to pay income tax). All of that means you can contribute, grow your account through investments, and withdraw without paying a penny in taxes. It's a triple-tax advantaged account, and as far as I know, there’s nothing else like it.
If earning, investing, and spending tax-free is an exciting idea, here’s how HSAs work and what you need to do to qualify or get started.
How Do HSA Accounts Work?
HSA accounts are standalone savings or investment accounts. You might find one through an employer HSA program, or you can pick your own from a growing list of HSA providers, including Lively HSA and Fidelity Investments.
Who Is Eligible for an HSA?
HSA accounts are not available to all Americans. You’ll need an insurance plan that's termed a high-deductible health plan (HDHP) to be eligible. The minimums change every year, so you’ll want to check the latest stats before contributing. These are the rules for an HDHP for 2022:
If you have a lower deductible or a higher out-of-pocket maximum, your policy is ineligible for an HSA. However, if your deductible and maximums are within those bounds, you’re good to move forward and contribute. Keep in mind, though, that if you or a family member get seriously sick or injured while you have an HDHP, healthcare could get very expensive.
HSA Contribution Limits
Contribution limits also change annually and are set by the IRS. For 2022, the maximum an individual can contribute to an HSA is $3,650. If you’re on a family HDHP, you can contribute up to $7,300 tax-free. Even if that’s a big chunk of your income, it can make sense to save the max. More on that below.
The system also allows for some flexibility. The Last Month Rule states that if a person is deemed eligible for an HSA on the first day of the final month of the tax year (December 1 for most people), that person has eligibility for the entire year (in other words, the previous 11 months). That means the person can then make their entire HSA annual contribution in those final 31 days of the year. The downside, though, is that the person must remain eligible for the HSA through the entirety of the next year (December 31 of the following year for most people), with the exception of disability or death, or the contributions will end up being counted as income (and that person also will be subject to a 10% penalty).
What Expenses Are Eligible for an HSA?
Most medical costs ordered by a doctor or medical professional are eligible for HSA coverage. That includes doctor visits, hospital visits, prescription medications, surgeries, tests, and doctor-ordered medical devices. Even items like contact lens solution and menstrual care products are eligible.
Many over-the-counter and self-ordered medical costs are not included, so it’s best to check with IRS rules or to work with your doctor if you’re planning on a significant expense. COVID-19 legislation expanded access to many over-the-counter products, but it’s still worth checking the list to make sure your purchase is eligible for an HSA if you have any doubts or questions.
Using an HSA to Pay for Healthcare Expenses
Most HSA providers offer a combination of a cash and investment account. The cash is used to buy new investments or to pay for eligible expenses. You can buy and sell investments at any time with no tax implications. The big rule to remember is that you can only withdraw for qualified healthcare expenses.
If your account comes with a debit card, that’s likely the quickest and most convenient way to pay for and to track your HSA-related costs. You can also track receipts yourself and reimburse yourself from your account balance. For example, this method is better for financially savvy households looking to earn credit card rewards and still get the tax benefits of an HSA.
You’re allowed to pay for the expense or reimburse yourself right away, which is what most people probably do. But here’s the secret. You can wait to reimburse yourself later. Like, way later. Like, decades later. Like, in retirement. See where we’re going with this?
Hacking Your HSA into the Best Retirement Account
An HSA isn’t just a health savings account. It’s a secret retirement account in disguise! Hence, the Stealth IRA nickname. If you keep track of those healthcare expenses and hold off on reimbursing yourself until retirement, you’ve just created yourself a completely tax-free retirement account.
If you want to retire early or when you turn 90, you can withdraw funds to reimburse yourself for medical costs from long ago. That’s a fantastic opportunity to save and invest for your future with an almost unheard-of tax benefit. Just remember: Keep track of your receipts.
What About California and New Jersey?
CA and NJ don't recognize HSAs so you actually have to pay state income taxes as they grow as though they were a taxable account. CA and NJ residents still enjoy the federal income tax benefits of using their HSA.
Fitting an HSA into Your Financial Plan
Coming up with an extra $3,000-$7,000 per year for investments isn’t easy for everyone, but the tax benefits here make an HSA a no-brainer if you’re eligible. Even if that means taking a little from your other retirement contributions, the tax benefits here make that switch completely worthwhile, particularly if you’re going to use the account for retirement.
When planning for your retirement or healthcare expenses, an HSA is undoubtedly worth considering. If you’re eligible for this account, the tax benefits overwhelmingly say it’s a good idea to sign up. For a high-income earner, an HSA could end up being one of the best accounts in your portfolio.
If you need extra help with HSAs or other tax-protected accounts, hire a WCI-vetted professional to help you figure it out.
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My wife’s job qualifies us for state government health insurance (via Blue Cross Blue Shield). I have always been under the impression that this type of health insurance is ideal. However, after reading about HSA… any good insight or sources in regards to switching out of state government health insurance and getting a HDHP to qualify for an HSA?? (as it stands, our minimum deductible and maximum out-of-pocket costs do not make us eligible for an HSA).
Hi, thanks for everything you do for us!
I’m a resident (PGY-3) with about 1800 in an HSA right now and contribute about 200 monthly.
is it worth continuing to contribute to my HSA despite likely not having a high deductible plan once i complete residency at the end of PGY-5 year and will not be able to contribute once I find my first attending job?
Sure. You can keep and use it the rest of your life even if you can never contribute to it again because you never use an HDHP again. But many attending jobs offer HDHPs later.
What’s the point of waiting to reimburse from HSA till retirement?
If I have a medical expense now and I use HSA distribution for that – my taxable income will get reduced. For example, if I use $3650 for a qualified expense then I save 35% on that $3650. That extra money can then be invested (maybe around 8% return).
If I wait till retirement that money will possibly grow at a rate of 8% every year with the only advantage that gains will be tax free.
The math may be complicated but is tax free gain in HSA better than avoiding income tax on $3650?
Thank you for the article!
No, your taxable income is reduced by contributions, not withdrawals. The point of waiting is to allow more time for tax-protected growth.
However, spending from an HSA as you go along is certainly a reasonable way to use it.
https://www.whitecoatinvestor.com/the-best-ways-to-use-an-hsa/
Does the White Coat Investor have any affiliations with reputable HSA offering companies? I work in private practice healthcare and don’t have this offered through an employer.
Lively is our only sponsor that offers an HSA. My other recommendation is Fidelity, but they don’t sponsor. Links here:
https://www.whitecoatinvestor.com/retirementaccounts/
If I may suggest something, it should be mentioned that HSAs are not recognized in California. I am about to get an HSA and even though I still think it’s worth it, HSAs are not recognized in California (and I think 2 other states) so there are some special considerations when it comes to HSAs in these states (I randomly found out about this while reading another blog). I don’t think there’s any mention of this in the WCI (unless I missed it).
Good suggestion. Same issue in New Jersey. I don’t know of a third state. It’s definitely mentioned somewhere on this website but it doesn’t hurt to mention it in this post. I’ll add a line.
1. If there is money in an old HSA from residency that has been never used; can it be rolled over to another HSA or any other account without any penalties or tax?
2. If employer offer a high deductible health plan but the HSA custodian in that plan is say health equity. Do we have to use that custodian or can we chose the high deductible health plan and then open an HSA on our own with a different custodian like fidelity or lively?
3. If spouse has an active HSA or FSA but the other spouse in not on the health insurance can the other spouse open a separate HSA?
4. If one spouse has an old HSA from residency and not contributing anymore does that bar the other spouse from opening an HSA?
1. Yes.
2. No, you can choose. But if you have it at least go to health Equity initially, you’ll likely save some payroll taxes on it.
3. Spouses can have separate HSAs, but must each be on a separate HDHP.
4. No.
Lets say I have a HSA account that is fully invested (the HSA allows me to invest in ETFs and stocks)
I have medical expenses in the proceeding years before turning age 65 when I can cash out my HSA
I use the medical expenses as a tax deduction since I am above 7.5% AGI and have gone beyond my standard deduction. Can I still use the HSA years later when I cash out at age 65 to take the money to cover the medical expenses earlier even though I took a tax deduction for the 7.5% AGI and was over the standard deduction limit for the years I had high medical bills.
How would you recommend I do this so that I can use the funds from my HSA later? In other words pay for it now and then take out my HSA funds tax free later.
No. Will you get caught? Probably not. But that would be double dipping which is expressly forbidden. I guess you could use saved receipts for the amount under 7.5% AGI.
My employer does not offer pretax HSA contributions. Is it still worth my time to keep an account with post-tax income?
HSA contributions are never post-tax. They might be post payroll tax if you write the check yourself like I do each year (it’s pre-payroll taxes if it comes directly out of your paycheck) but it is never post income tax. You get the deduction even if your employer doesn’t withhold the money.
I have a HDHP with Regence via my employer. The individual deductible is $3000, however the out of pocket maximum is $8300. I believe my out of pocket maximum would disqualify me for an HSA. However when I called Health Equity (the recommended HSA provider via Regence) the agent said she was “sure” that since my deductible was $3000, I qualified, even though my out of pocket maximum is over the amount….I even asked to speak to a higher up to confirm but again she said she was very sure I would qualify and to apply.
Does one qualify for an HSA if the individual deductible qualifies but the out of pocket maximum is over the amount? Seems like your article is saying no, but these agents at Health Equity are saying yes…
The plan has to be designated by the federal government as a High Deductible Health Plan. Just having a high deductible isn’t enough.
Oh this is good to know…
I’ve been calling around and am not certain I’m getting accurate answers, both from Regence or even Health Equity (I’ve called both a few times and spoke to various folks) neither has been able to confirm if my plan is a “HDHP” and rather simply asked about my deductible.
Any advice on who/what else to check with regarding this to see if my plan qualifies?
Is it worth attempting the HSA application -assuming it’ll make sure my plan qualifies during the application?
Your first line is that you have a HDHP. If that’s the case, then sure, use the HSA. Regence certainly offers HDHPs and that’s who I’d call to be 100% sure I had one:
https://www.regence.com/member/understanding-health-insurance/all-about-hsas
I have insurance through my current employer and have contacted our online Benefits Account Manager about setting up an HSA. They are firm in their stance that our plan does not qualify for a HDHP despite satisfying the annual deductible and out-of-pocket expenses. Their reason is a follows:
“It also references that preventive care can be covered without a deductible it means it must be covered at no cost or a lower deductible than the minimum annual deductible because HDHP plans cannot have copays paid before deductible.
Copays are the difference between traditional and HDHP plans.”
I’m confused as I am not able to find much pertaining to copays disqualifing one from HSA eligibility.
It just has to meet the federal requirements to be an HDHP. Apparently one of those is this co-pay thing. I’m sorry but sounds like you don’t qualify to contribute to an HSA this year.
My employer offers an HSA eligible plan however offers an HRA to cover the deductible of 3.5k. They don’t offer a HSA. I am told that If I wish , I can waive /decline the HRA and open an HSA on my own with my bank and set up payroll deduction to this HSA account.
1. Is opting out of a HRA advisable in this case.
2. I read that the employer has to have a cafeteria plan to allow payroll deduction for HSA. Does that mean that the HSA has to be set up/ offered by a third party designated by the employer or just that they have to have this cafeteria plan written and can do payroll deduction to a HSA of my choice ?
3. If I cannot do payroll deduction ( to get triple tax advantage) , is it still worth foregoing the HRA and contributing to HSA post payroll since the deduction can only be claimed for state and federal tax and not FICA ?
1. No.
2. Not true.
3. No. I don’t think it’s worth it if you can do payroll deduction. I’d take the free $3500 over being able to contribute $8K to an HSA. Choose the health care plan first, THEN if it’s an HDHP (apparently without an HRA) use the HSA.
I have already elected a HDHP plan with 3.5k deductible and they will give an HRA of 3.5k to cover deductible.
However if I want HSA , I have to set it up on my own and decline HRA. Is it worth it to set up HSA in this scenario outside payroll deduction?
Also could you explain your answer “No” to bullet point 2 above regarding payroll deduction.
Thank you.
That’s exactly what I’m saying. The annual benefit of access to an HSA is less than $3,500. I’d take the $3,500. Even if you only spend $2,000 of it, that’s still probably a better deal. So your HDHP + employer funded HRA is better than an HDHP + a self funded HSA. An HRA basically turns a HDHP into a low deductible health plan.
You wrote: “I read that the employer has to have a cafeteria plan to allow payroll deduction for HSA. Does that mean that the HSA has to be set up/ offered by a third party designated by the employer or just that they have to have this cafeteria plan written and can do payroll deduction to a HSA of my choice ?”
If you want payroll deduction, you have to use the HSA designated by your employer (although you can periodically do rollovers away to an HSA of your choice). I guess if you want to call that a cafeteria plan, then it’s true. But I always think of a cafeteria plan as something that offers a handful of different benefits, not just one. Maybe my definition of cafeteria plan is wrong.
I will be getting on my wife’s employer’s health insurance plan. They pay the premiums for the entire health plan or they contribute $1000 to an HSA for the HDHP. Should I take the PPO that they pay for or use an HSA with their contributions?
Thank you.
I’d take the plan they pay for as discussed here:
https://www.whitecoatinvestor.com/should-i-get-an-hdhp-just-to-use-an-hsa/
That’s way more valuable than just $1,000. Probably more so than an entire HDHP paid for plus $1000.
I’ve never had access to a HDHP in the past, but I recently began a 3rd job working as a medical director for a company that offers a HDHP. My current healthcare plan comes from my primary job where I am a partner in a large multispecialty clinic. All partners are automatically enrolled in an expensive (with zero deductible and excellent coverage) health plan that comes out of overhead pre-tax. I have asked to opt out and get that amount back from overhead but the board has not been willing to do that. I am also eligible, but not paying for, Tricare as a member of the National Guard. So, I have several healthcare options.
I’ve wanted to contribute to an HSA for many years, but it hasn’t been available until now. The cost for the 5k deductable plan for a family is $527.68/month and as low as $188.98/month for just myself with options for employee plus spouse or employee plus children in-between. Would it make any sense at all to sign up for one of these HDHPs in order to open up eligibility to an HSA? (We have a very healthy family without any chronic medical conditions, knock on wood.)
I would have to pay $2268/year individually to be able to contribute $4,150 as an individual, and pay $6332 to contribute $8300 for a family plan.
Do the triple tax benefits justify the costs for an insurance we are unlikely to use?
Choose the right plan for your family first. If that’s an HDHP, then use an HSA. You don’t mention the price of the zero deductible plan but that may be your best option.
https://www.whitecoatinvestor.com/should-i-get-an-hdhp-just-to-use-an-hsa/
Thanks so much for the reply.
The zero deductible plan costs about 18k per year, so about 3x the amount of the HDHP currently offered to me. If I could get the board to allow me to not purchase their plan I would have gone with Tricare years ago (or do Tricare and the HDHP which combined would cost less.)
Sounds like the HDHP is best for you and your family. Why in the world would the partnership REQUIRE you to buy the partnership plan? Mine doesn’t. You sure that’s right?
At any rate, remember the requirement for HSA contribution is that your ONLY plan has to be an HDHP. If you also have a low deductible plan or tricare, you’re not eligible to contribute to HSA.
Hi WCI! I will be starting with a new employer this coming November. They have a HDHP with an HSA. I want to be able to take advantage of the ‘Last Month Rule’ as I will be covered under this new HDHP by December 1. I will be with the company for at least a year, so I will retain the HDHP through December 31 of the following year (no testing period issues). My question is, do I still qualify for the HSA if I had a non-HDHP of my own or if I was covered by my spouse’s non-HDHP leading up to December 1 as long as I am not covered under either plan by Dec 1?
Thanks for all you do!
Yes you do.
Under the last-month rule, you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers) and you meet certain other requirements.
https://www.irs.gov/publications/p969#:~:text=Under%20the%20last%2Dmonth%20rule,you%20meet%20certain%20other%20requirements.
I am starting my first attending job and have enrolled in the HDHP with HSA plan offered through HSA Bank. I am planning to contribute the maximum per year; however, I also have an old HSA with Health Equity through my residency. If I’m understanding correctly, it seems that it would be more beneficial to contribute everything to the new HSA since funds would be taken directly from my salary on a tax-deferred basis. Or would there be any benefit to contributing to the old HSA?
Additionally, I am considering rolling over the old HealthEquity HSA given fees associated with its maintenance (plus it seems like HSA Bank offers a better experience based on other articles you’ve published). Would there be any benefit to not rolling it over and leaving it with HealthEquity or alternatively rolling it into a better though non-employer HSA through Fidelity or Lively?
Thanks so much for all you do for the physician community!
I’d contribute to the new and roll the old in there for simplicity. Now, whether the new is HSA Bank (which I’ve heard a few gripes about recently but might save you some payroll taxes) or Fidelity is up to you.
Will be transitioning to an HSA this spring, have never used in the past. You mentioned you prefer Fidelity, and we have other Fidelity accounts. Do I simply roll the HSA funds from the employer sponsored plan into a Fidelity HSA? Anything to watch out for when doing this?
Pretty much. Not really. Start by contacting Fidelity and they’ll guide you.
I have a bit of predicament. My employer made a $100 contribution to my HSA in 2024 when I did not have an eligible plan (switched over to no HDHP in 2024 when working for the feds). I only found out about this HSA account (got no letter or notice) 12/2024. I have 85$ left in the account due to fees from the HSA account. I had a contribution of $100 in December 2022 when I was eligible for HSA. So would have had $200, but fees brought that down to 85$. Since I did not remove the excess amount in 2024 yet and paid the excess fees in 2023 (with amended return). Do I report as nonmedical distribution in 2024 (remove 85$ as nonmedical minus 25$ HSA termination fee) or should I report it as $100 as just pay the taxes on it? Any thoughts? This was for a federal employer. Would have thought they would realized I changed the plan in January 2023?
Thank you
An excess contribution was made. So I’d withdraw that and pay taxes on it.
https://www.hsacentral.net/resource-center/articles/taking-care-of-excess-hsa-contributions/
You may owe the 6% excise tax too.
Hi,
My husband has qualified self-only coverage and I have a separate qualified family coverage (for myself and my daughter). The maximum HSA contribution for us in 2025 is 4300+8550 or just 8550? Thank you!
Thank you for this post on HSAs. I am so new to this concept. I have an additional question: I just started a job that offers the HSA benefit and that contributes an additional $50 per pay period to it. I started in May, signed up for the family HSA (I am only on a HDHP and my husband and child are on this plan in addition to their Kaiser insurance). Can I still do the full family contribution? (I am asking through both the lens of the insurance situation and due to the fact that I just started employment part way through the year). We are in California. There is a possibillty that I may leave this job in a year and move back to Oregon and all go back under my husband’s insurance (non HDHP).
No. You can do a full single contribution for you due to the last month rule. But this is not anyone else in the family’s only plan so you can’t make a family contribution.