Smart strategies for your health savings account

Health insurance options are confusing at best, and employees are often overwhelmed by what to select when starting a job or during open enrollment. While a high deductible health plan, or HDHP, may sound a bit scary, it just means you pay a lower monthly premium but a higher annual deductible for health care. How high? In 2022, the deductible is at least $2,800 for a family and $1,400 if you’re single.

One advantage of a high deductible health plan is that it comes with the option to save money in an HSA. An HSA, or health savings account, is a triple tax-advantaged account where you can put money in before taxes, let it grow tax-free, and then take it out tax-free while you’re using it for a qualified medical expense.

Don’t confuse HSA with FSA

While HSA and FSA may sound similar, they are very different accounts with different rules. The FSA, or flexible spending account, can be used for any type of health insurance plan, while an HSA is only used with a high-deductible plan. Although your employer may offer both the HSA and the FSA, the HSA can go with you if you change employers or retire.

Flexible spending accounts have limits each year on how much you can carry over to the next year, and as such are intended to be used for medical expenses within the year. For your health savings account, you can choose not to withdraw any amount in that year and all the money will roll over to the next year and beyond.

save those receipts

While you can roll over the money from year to year in your HSA, you’ll need to track each medical expense and then withdraw the money as a qualified expense.

Save those receipts! The IRS determines what qualifies as a qualified medical expense, and if the amount of your withdrawal does not qualify, you will be assessed a tax penalty. Keep track of your medical bills, expense receipts, and other documents so you can withdraw the exact amount you spent to avoid the penalty and get the money tax-free. Another thing to keep in mind is that those same expenses you want to take out of your HSA can’t be taken as an itemized deduction on your taxes that year.

How steep are the tax penalties? There is a 20% tax on any withdrawal amount not used for a qualified medical expense. There’s some good news: The IRS has an exception for not paying additional taxes on distributions from an HSA after you become disabled, turn 65, or die.

Using your HSA as an investment strategy

One of the main advantages of the health savings account is that you are putting money in before taxes, which allows the tax tree to grow, and then withdraw it tax-free as long as you have a qualifying medical expense. These tax savings, combined with the investment potential of the account, can add up over the years. One investment strategy for your HSA is to maximize the amount you can contribute each year. In 2022, the current limits are $3,650 for self coverage and $7,300 if you have family coverage.

If your employer matches contributions, take advantage of the match. You should consider the employer matching contribution, as it reduces the amount you can contribute. Take the amount your employer contributes to your HSA and subtract it from your maximum contribution amount to determine how much you can contribute each year.

Keep in mind that HSAs aren’t subject to required minimum distributions like an IRA or 401(k), so there’s no set amount you must withdraw each year once you turn 72.

It’s always best to discuss your investment strategies with a financial advisor who can review your entire financial situation and help you determine the best course of action for your specific needs.

Please note that the information provided on this website is for informational purposes only and investors should determine for themselves whether a particular service or product is suitable for their investment needs. The content on this website is not intended to provide tax, legal, or accounting advice, and you are encouraged to seek qualified professionals who can provide advice on these topics for your individual circumstances.
Investment advisory and financial planning services offered through Diversified, LLC. Securities offered through Purshe Kaplan Sterling Investments, a member FINRA/SIPC located at 80 State Street, Albany, NY 12207. Purshe Kaplan Sterling Investments and Diversified, LLC are not affiliated companies.
Diversified, LLC is a registered investment adviser with the US Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the SEC. Diversified only transacts business in states where it is properly registered or is excluded or exempt from registration. A copy of Diversified’s current written disclosure pamphlet, which discusses, among other things, the company’s business practices, services and fees, is available through the SEC’s website at: Investments in securities involve risks, including possible loss of principal. The information on this website is not a recommendation or an offer to sell (or the solicitation of an offer to buy) any securities in the United States or any other jurisdiction.

President, Partner and Financial Advisor, Diversified, LLC

In March 2010, Andrew Rosen joined Diversified, bringing with him nine years of experience in the financial industry. As a financial planner, Andrew builds lifelong relationships with clients, providing guidance through all stages of life. He has earned his Series 6, 7 and 63, along with property/casualty and health/life insurance licenses.

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