By Dr. James M. Dahle, WCI Founder
Here's a question I discussed several years ago about one of my favorite investing accounts.
“I've heard all about using an HSA as a triple tax-free account and/or a Stealth IRA and I'm excited to have some more tax-protected space. However, I have a non-high deductible health insurance plan available through my work and wonder if I should use that instead of an HDHP.”
I get this question a lot. It's important not to miss the forest for the trees and to let common sense prevail. However, before addressing the question, let's talk a little bit about Health Savings Accounts (HSAs).
Health Savings Account Rules
HSAs are one of my favorite types of accounts. They are the only “triple tax-free” account in that they give you a tax-deduction upfront, grow in a tax-protected manner, and then allow you to withdraw everything tax-free (as long as the money in the account is spent on healthcare). If not spent on healthcare, you must pay taxes plus a 20% penalty on withdrawals, unless age 65 or older—in which only the tax is due, much like a traditional IRA or 401(k). In addition, if your employer makes the contribution as part of a cafeteria plan, contributions are also FICA tax-free. Self-employed folks, unfortunately, are out of luck there.
For 2022, HSA contribution limits are $3,650 ($7,300 if married) plus an additional $1,000 “catch-up” if you are 55 or older, and in 2023, those limits are expected to increase to $3,850 and $7,700, respectively.
To contribute to an HSA, you need to have an approved High Deductible Health Plan (HDHP.) That is defined by the government in 2022 as a deductible of at least $1,400 ($2,800 married) and a maximum out-of-pocket amount of $7,050 ($14,100 married).
No HDHP, no HSA.
Many people don't realize you don't need to use the HSA your employer has lined up. You can contribute to any HSA you please or transfer your money from your employer's HSA to another one. This allows you to take advantage of HSAs that may pay particularly high rates or HSAs that allow you to invest the money in low-cost mutual funds—which is a great strategy if you don't intend to spend the money for decades.
3 Good Ways and 1 Bad Way to Use an HSA
#1 Pay Retirement Health Care Expenses
The very best bang for your buck with an HSA is to contribute now and get the tax break, let it compound for decades, and then spend it on healthcare in retirement. This maximizes the tax benefits of your only triple-tax-free account.
#2 Pay Healthcare Expenses Now
The original intent of HSAs was to enable people to have money to pay their high deductibles on their HDHPs. The two ways to let market forces fix our healthcare problem are to increase cost-sharing and to add price transparency. Well, the HDHP/HSA system does the first, even if it doesn't do the second. The tax benefits of an HSA are to entice people to actually contribute to their HSAs. Even if you turn around and spend the money a month later, it's still a pretty good deal. You basically get to pay for healthcare tax-free.
#3 The Stealth IRA
Another great use of an HSA is to not spend it on healthcare at all. After age 65, it basically turns into a traditional IRA. The nice thing about this feature is it eliminates all worry of overcontributing to these accounts. If you turn out to be really healthy and the investments grow like crazy so that you have a $1 million HSA, well, you can use it to buy a boat in retirement. It's just another tax-protected retirement account.
#4 Cashing Out
Really, the only bad way to use an HSA is to spend it on something besides healthcare before age 65. Not only will you pay tax on the money, but you are also going to pay a 20% penalty. The effective tax rate on that money will probably be somewhere between 45%-70%, not exactly a good deal.
Answering the Question
As you can see, HSAs are pretty awesome. Because they are so awesome, some people will do anything to get one. That's not necessarily wise. For example, if you or a family member are particularly unhealthy or take an expensive medication and are going to hit your deductible every year, you're probably better off getting a health insurance plan with a lot lower deductible—even if the premiums are higher. Likewise, if your employer pays some or all of your health insurance premiums, it doesn't make sense to turn that benefit down (unless you can exchange it for a higher salary) just to get an HDHP/HSA. Many times, it's your spouse's healthcare plan. A doc I know, for instance, has a spouse that works at the local university hospital. They pay almost nothing for healthcare. An HSA is not for them.
But in general, docs are pretty good candidates for HDHPs. They don't tend to run in and get seen for stupid stuff. They can often take care of little things themselves. They may benefit from professional courtesy or at least a discounted rate. They have plenty of income to pay high deductibles. Plus, they're generally relatively healthy. If you're buying your own health insurance on the open market like I do, you might as well get an HDHP so you can use an HSA.
If you need extra help with planning for retirement or have
questions about the best way to save your money in tax-protected accounts, hire a WCI-vetted professional to help you figure it out.
What do you think? Do you have an HSA? How do you intend to use it? Comment below!
[This updated post was originally published in 2015.]
WCI,
I thought my situation would be simpler because I pay no premiums whatsoever–but I wonder if that might shrink some of the benefit of taking the HSA over a traditional copay plan. The deductibles are $1000/$2000 (single/family) for the copay plan and $3000/$6000 for the HSA plan.
We are a young healthy family with no regular meds. So in general doing the HSA would benefit us as long we stay healthy. But if we have a bad year with a couple ER visits, we would end up paying $6k instead of $2k thereby losing all the tax-saving gains for a few years. Again, I’m not saving anything in premiums by picking one plan over the other.
So does my decision really just come down to placing a bet on the general health of my family over the coming years?
Yes, if your employer will cover the premiums either way without you losing pay or other benefit, sure, take the more expensive plan (which is likely the non-HSA one.) Now, if your employer would also be making an HSA contribution for you, that’s a different story.
This is a wonderful benefit offered by my employer. They cover premiums for either plan, but also fully fund the HSA if you choose the HDHP. An extra $6750 in triple tax free benefits is nothing to sneeze at
Wow! Nice employer!
Read WCI all through residency and felt well prepared to compare apples to apples when it came to compensation packages for life post-residency. Thanks for all the high-quality, free, financial education. It’s made a huge difference in the lives of your readers
Hello WCI. I am sole owner of my S chapter. I will be switching to a HDHP with HSA next year.
1) How can I fund the HSA? Am I allowed to have the Corporation fully fund the HSA with Employer contributions only? Or do I need to fund with pre payroll tax dollars as an employee?
2) I invest with fidelity. How do you feel about their HSA these days? I read a blog from 2012 where you mention them.
Thank you.
1) You certainly can do it just as an employee. You can open your HSA anywhere and make a contribution and take the deduction on the 1040. The only benefit of having the corporation do it would be to avoid paying payroll taxes on that money. I think you can probably do that as an S Corp but I am not 100% sure, nor do I have a reliable place to send you to get that information. But it would save you 2.9% of $3-6K, so maybe as much as $200 in Medicare tax.
2) I don’t think you can open one at Fidelity unless you’re a big employer. More info here: https://www.bogleheads.org/forum/viewtopic.php?t=171011
I use HSA Bank/TD Ameritrade. It works well for me. You can leave $5K in cash making 0.5% to avoid fees, or just pay the ~$50 a year in fees and invest the whole thing in Vanguard ETFs commission free.
Hi WCI,
As the new year approaches and I am shopping for a new health insurance plan, I am wondering whether my situation makes sense to pursue an HSA as a Stealth IRA. Young and healthy, currently shopping through my state’s exchange website. The cheapest HSA plan comes in at around $90 more a month than the cheapest overall plan (not HSA eligible). Would it not make more sense to pay the higher premium for the HSA plan, given that the tax deduction alone on a maxed out HSA (at a 28% marginal tax rate) would almost equal the increased yearly premium cost, not to mention the tax free growth vs using a taxable retirement account? Am I missing something here?
Additionally, my job will begin providing medical expense reimbursement in the coming months, which I am planning on using towards these premiums. That shouldn’t effect my eligibility to contribute to the HSA and deduct those contributions?
Any help would be greatly appreciated.
Not enough info to make any sort of recommendation, but the general approach is to figure out which plan is best for you and your family and if a HDHP makes sense for you, then be sure to use an HSA. For example, if the cheapest overall plan you’re referencing above has a deductible of $250 and your HSA eligible plan has a deductible of $2500 and higher premiums, I’m not sure I’d do that even if it meant giving up that additional deduction.
I don’t know the rules of your employer provided medical expense reimbursement benefit so can’t really say. Some unlimited purpose HRA/FSA accounts do prevent you using an HSA. See page 4 of this link: https://www.irs.gov/pub/irs-pdf/p969.pdf
My husband and I were anxious to enroll in a high-deductible plan to max out our HSA this year, now that we’ve completed residency. We just found out, however, that both of our new employers cover our entire health care premiums, both for self and spouse. I’m pregnant with our first child. So, we anticipate my own health care expenses to be high. Our options are as follows:
1) Go with the low deductible plan ($350/individual) without option of HSA, invest the savings elsewhere. Premiums 100% covered.
2) Go with the high deductible plan ($2500/individual) and max out HSA. Premiums again 100% covered.
From my understanding, option #1 would make the most sense at this time given we anticipate far surpassing the deductible for at minimum myself. Would you agree?
I agree. Buy the plan that makes sense first, then if it is an HDHP, use the HSA.
It may make sense to not use the HDHP, but shouldn’t you really be looking at what the max out of pocket is instead of the deductible? You will blow through both of those deductibles, but really you are looking for what the cap on your spending is. Our Max OOP is less than the HSA limit, so when we max the HSA we are guaranteed to be saving some with that triple tax protection. If the HSA Max OOP is $3000 but the copay plan is $5000, it might still make sense to take the higher deductible.
Excellent point.
Married physician couple with kids at same employer, we’re offered 2 tiers of a hdhp and 1ppo copay. We each have to sign up for plans individually 2/2 to a penalty fee otherwise. Currently, I have hdhp with 3400 hsa, she and the kids have ppo copay.
Anyway, we have a scenario at next enrollment where I can have the $3400 HSA single plan and she can have a $5000 family HSA. Or are there rules disallowing this? I can’t seem to time the answer anywhere. Thanks!
Married physician couple with kids at same employer, we’re offered 2 tiers of a hdhp and 1ppo copay. We each have to sign up for plans individually 2/2 to a penalty fee otherwise. Currently, I have hdhp with 3400 hsa, she and the kids have ppo copay.
Anyway, we have a scenario at next enrollment where I can have the $3400 HSA single plan and she can have a $5000 family HSA. I could even take a kid and we both have $5000 plans?
Or are there rules disallowing this? I can’t seem to time the answer anywhere. Thanks!
Married physician couple with kids at same employer, we’re offered 2 tiers of a hdhp and 1ppo copay. We each have to sign up for plans individually 2/2 to a penalty fee otherwise. Currently, I have hdhp with 3400 hsa, she and the kids have ppo copay.
Anyway, we have a scenario at next enrollment where I can have the $3400 HSA single plan and she can have a $5000 family HSA. I could even take a kid and she take a kid and we both have $5000 plans?
Or are there rules disallowing this? I can’t seem to time the answer anywhere. Thanks!
No rules disallowing it. Cool little loophole eh? One family can have two family HSAs as far as I know. But bear in mind if you two go on separate HDHPs, sure, you get two family HSAs, but you also have two family co-pays and max out of pockets. That could be a poor choice.
I have two quick ?’s. My employer just switched to Trinet and offer an HSA through payflex. Payflex says you can not invest unless hit $1000 in the account. 1) is this true for all plans? 2)how do I switch out of Payflex into something such as HSA bank? Trinet tells me its not allowed.
Thanks!
1. No.
2. Do a rollover. HSA Bank can help. You might be limited to doing it once a year, but double check that. “It’s not allowed” is BS. (Be sure you’re talking about an HSA and not an FSA.)
My employer offers the EPO plan and the HSA plan at the same premium. They do however put in 1000 dollars for you. My question is it worth taking a chance to open HSA plan or just roll with the EPO plan.
You mean you get the EPO or you get the HSA + $1000? I guess I’d look at what I spent in 2017 on health care and see which way I’d come out ahead. If you hit your max out of pocket, the EPO is probably for you. If not, that HDHP is looking pretty attractive to me.
I believe you still use HSA bank for your account. Since I’m just an individual and can only contribute $3450 for 2018 (first time opening an HSA), is HSA bank the best option? I see they charge a monthly fee of $2.50, which would apply to me since I cannot contribute 5K (due to the IRS limit) in order to have the fees waived. Also, I will likely use most of the $3450 this year and won’t have a huge amount to invest. Would it then make sense to choose a bank with no monthly fees this year and roll this account into HSA bank in 2019 in order to start investing? If so, which bank would you recommend for this year? Thanks so much!
I just finished a review of HSAs and will run it soon. HSA Bank came out # 2 in my list of best HSAs for investing. If you’re planning to spend most of your HSA each year that list isn’t going to be all that relevant to you. The good news is it doesn’t matter much if you’re spending from it.
Looking forward to reading your upcoming review of HSAs. Since I plan on using most, if not all, of the max contribution I could make into an HSA ($3450) this year, does it even make sense to open an HSA? I qualify for an HSA with my current insurance plan, but I currently have an LLC and these healthcare-related costs would be counted as expenses anyway. Is it a hassle to transfer from 1 HSA to another? Thanks again!
It’s a minor hassle to transfer. I would still use an HSA of some kind as it will allow you to pay for health care with pre-tax dollars. That’s worth over $1K to you, no? But you might not want to focus on the “best investing HSA” which is what my post will be about.
I’m getting ready to set up my HSA for the first time. Do you mind telling me which provider was #1 on your list?
I have to set this up very soon
Thank you very much,
Jacob
Lively.
I was reading through this website and the HSA’s and as a health insurance broker, I couldn’t agree more. What is equally exciting though Medicare Savings Accounts were introduced which act very similarly to HSA’s, but for those with Medicare. You still have to pay the Part B, but there is no additional premium after that. And the plan invests the money for you, which probably sounds too good to be true, but this happens when taxpayer dollars are going towards Medicare on your behalf. No network of doctors or referrals. Most agents don’t currently understand or sell this product because it’s new, confusing, and easier to sell medigap or MAPDs. Anyway, I’m here to help with any questions.
I can’t seem to find anywhere that allows you to invest a medicare savings account in mutual funds like an HSA. Do you know of a place?
https://lassohealthcare.com/documents/Lasso%20Healthcare%20Member%20FAQs%2020191001%20Final.pdf
check out point 15
Thanks.
Hi Jim,
I work in a large academic center. I have always used UMR Choice for myself and family (2 kids, wife). I have the option for HDHP with an HSA for this open enrollment for 2022 however the caveat is next year (2023), they plan on not offering HDHP for whatever reason. Is it worth doing the HSA for one year?
I’d probably do it, but I guess you have to weigh the hassle in your own life of dealing with it.
Thanks for the reply. Are you saying the hassle of having just one year of HSA to deal for the “forever” as opposed to having years of it being worth it.
Not sure what you’re asking. Any new account has some hassle. The HSA benefit is $7K*your tax rate so maybe $2-3K in savings at a minimum. Is that worth your hassle? It would be to me.
Another wrinkle that occurs to me, now that we have high inflation, is that since there’s no time limit on when you can get reimbursed, you can leverage inflation to your advantage. You can basically pay yourself $2k in tomorrow’s depreciated dollars to pay for that $2k expense today, saving yourself the inflation. (The 2k can also appreciate in the account while you hold the receipts of course). Does this make sense?
No. Because you’re paying the expense today. You’re just doing it with different money. And then you can take less out (because it’s now depreciated) later. But you do get to benefit from tax-free compounding in the meantime.
What type of ETFs/mutual funds would you recommend for an HSA?
I guess it should be the types of funds you would use in a Roth?
Thanks
Depends on what you’re doing with it. If you’re leaving it there for decades, then you can invest aggressively. Stocks etc. If it’s money you may be pulling out this year, I’d leave it in cash. In between, maybe some stocks, some bonds, some cash.
I plan to let it grow for retirement
I meant more like whether it should be a bon fund or a REIT fund so the dividends can grow tax free
Long term? I’d choose REIT over bonds. But a lot comes down to whether you view it as part of your portfolio or a separate portfolio. If the first, REIT is fine. If the second, then something more diversified.
When shopping for a health plan on the marketplace some advertise HSA along with it and some don’t that seem to qualify based on the deductible limits you describe. In fact, plans offers by my employer include an HSA /HDHP option but then also a gold plan that also seems to qualify based on your description of the limits yet doesn’t say anything about an HSA. My question is – if we select a plan that ‘should’ qualify for an HSA but doesn’t offer it outright (even if there is a higher deductible matching HSA-advertised partner plan), can we still go to HSA bank or somewhere else by ourselves to xrcreat and fund the HSA?
It has to be qualified with the government as an HDHP whether it provides an HSA or not. It’s not about the HSA, it’s about whether it is an HDHP.
what I would love to do is create what might aptly be called a “Roth HSA.” When you set up your own HSA and do not use the employer-preferred company, you can either set-up pre-tax payroll deductions or you can just find the HSA with post-tax cash. What I want to do is:
1) fund the HSA with post-tax cash
2) When filing taxes, do not claim any pre-tax HSA contributions. You lose the tax benefit just like a Roth but…
3) At age 65, withdraw the money or use it for non-healthcare expenses without paying taxes
This is what I’d call a Roth HSA, and I’ve looked everywhere and asked lots of folks, and there isn’t much written about it. What happens if you use post-tax dollars to fund an HSA and correctly don’t claim a tax write-off each year… can you take the money out tax-free?? Why doesn’t the IRS address this in a FAQ?
There is no Roth HSA. If it is an HSA, then you get a tax deduction for the contribution or you can’t make the contribution at all. It doesn’t have to run through your employer to get a tax deduction, but that does get you some payroll tax savings.
If you save up enough receipts, you will be pulling that money out tax free anyway for non-health related expenses. If you don’t have enough receipts, well then you can use the remainder on your actual health expenses in your later years. Correct me if I’m wrong, but putting post-tax dollars into an HSA kinda defeats the purpose.
For federal employees (ie the VA), do you recommend HSA plans or BCBS Basic (and the like)?
Depends on the options being offered and your personal health care consumption. If you never go see a doc, an HDHP with an HSA is probably your best option. If you have RA and MS and see a doc every month, you probably are better off with a low deductible more traditional plan.
We’re switching to a CDHP with HSA this year and both now have the same employer. I’m wondering if we should do 2 separate plans to have 2 HSAs. Our employer contributes $500 to the single HSA and $1K for the family HSA.
The out of pocket max for single is $3K and $6K for the family, but the single HSA is $3,850 and the family $7,750. We are generally healthy in our early 40s with 2 year old twin boys. I know we could potentially spend $9K max if we did both. Is this a stupid idea?
I can’t remember if this is allowed or not. I looked into it a while back but can’t remember the details. Let me see if I can find them….
There it is: https://www.peoplekeep.com/blog/how-hsa-contribution-limits-work-for-spouses#:~:text=If%20you%20and%20your%20spouse,affects%20the%20limits%20for%20HSAs.
You can’t do it.