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Making the Most of Health Savings Accounts (HSA's)

Health Savings Accounts, or HSA's, were only introduced in 2004, and already there are over 20 million of them.  Much of that growth, however, has taken place in the last few years, driven by the recent popularity of high-deductible health insurance plans.  I've owned an HSA since 2011 and am a big fan of them, so let's discuss the benefits of these relatively new accounts.

First of all, if you or your family members aren't covered by a qualifying high-deductible health insurance plan, then you can't contribute to a Health Savings Account.  If you're not sure whether your insurance plan qualifies, you can ask your insurance company, your insurance broker, or your benefits department.  It's worth the effort because contributing to an HSA is the next best thing to a 401k contribution that receives an employer match.

The reason I say this is that the IRS allows HSA owners a rare tax "triple dip".  Contributions are tax-deductible or pre-tax, any earnings in the account are tax-deferred, and then withdrawals are tax-free when used for qualifying medical expenses.  Because HSA balances don't have a "use-it-or-lose-it" feature, unlike flexible spending accounts, they can be used as a supplemental retirement account for the purpose of meeting a wide variety of retiree medical expenses.

And this is really the best way to use these accounts if you have the financial resources.  That is, if you can afford to pay for your current medical expenses out of pocket, then do so but keep your receipts, maximize your contributions to your HSA and invest the balance for the long-term, and then reimburse yourself from this account tax-free in retirement.  If on the other hand, you foresee the need to tap your HSA balance for upcoming medical expenses in the near future, say in the next year or two, that portion of your account should be kept in a principal-protected investment option, like a savings account.

Some HSA service providers also allow you to link your account to a discount brokerage firm, giving you full access to a wide range of inexpensive investment options.  For example, I'm using HSA Bank as a record-keeper, and they allow transferring balances to an account at TD Ameritrade for longer-term investing. There must be other HSA service providers with similarly attractive investment platforms, but HSA Bank came highly recommended by some of my NAPFA (the National Association of Personal Financial Advisors) colleagues at the time.

(Being a Fee-Only financial advisor, like all NAPFA members, I receive nothing from referring anyone to HSA Bank, or to TD Ameritrade for that matter, but if you wish to learn more about HSA's, the HSA Bank website is also very educational.)

About the Author

Paul Winter, MBA, CFA, CFP® is a Fee-Only financial advisor and fiduciary in Salt Lake City, UT. His independent wealth management firm, Five Seasons Financial Planning, provides professional portfolio management and objective financial planning services to individuals and families, and to their related entities including trusts, estates, charitable organizations, and small businesses.  

Contact Paul