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  • Writer's pictureNathan Zarcaro

[2023] Is an HSA Worth It? It Can Make You Rich

Healthcare continues to get more expensive in this country. But the good news in all of this is that Americans have never had more options to help afford these costs. The best (and most common) option today is the Health Savings Account, HSA for short.

But is funding and using an HSA worth it? And can it help you become rich?

What is an HSA?

An HSA, a Health Savings Account, is a type of financial savings account that allows account holders to save money on a pre-tax basis to pay for qualified medical expenses.

Available only to those who have high-deductible health plans, HSAs are highly coveted due to their tax advantages. You can:

  • Make your contributions on a pre-tax basis, lowering your taxable income in the progress

  • Invest your contributions and let them grow tax-free

  • Withdraw your contributions and capital gains tax-free

That's right. HSAs are triple tax advantaged.

In addition, HSA contributions or capital gains are not on a "use it or lose it" basis each year like Flexible Savings Accounts (FSAs) are. Rather, your HSA is intended to be used as a way to prepare for future medical expenses.

Who is eligible to use an HSA?

Health Savings Accounts can be funded and used by those on qualifying high deductible health plans (HDHPs). To qualify to use an HSA, you'll need to:

  • Be at least 18 years of age

  • Be enrolled in a HDHP with an annual deductible of at least $1,500 as an individual and $3,000 as a family (in 2023 - it changes every year)

  • Have an out-of-pocket maximum of at least $7,500 as an individual and $15,000 as a family

How much can you contribute to an HSA?

Because HSAs are so tax advantaged and in demand, there are limits to how much you can contribute in a calendar year. This amount may change from year to year, subject to IRS decisions, but in 2023, the contribution limits are as follows:

  • $3,850 if insuring yourself

  • $7,750 if insuring a family

If you overcontribute to your HSA, you are subject to penalties, in the form of a 6% excise tax on your excess contributions each year that they remain in your account. Excess contributions are also considered taxable income. If you realize your mistake before the end of the year, you may be able to withdraw your excess contributions without penalty.

What can you use an HSA for?

Health Savings Accounts can be used for a variety of qualifying healthcare expenses, including:

  1. Doctor's visits (of many types)

  2. Prescription drugs and medication

  3. Durable medical equipment (DME), including wheelchairs

  4. Diagnostic testing and lab work

  5. Behavioral health services

  6. Chiropractic visits

  7. Physical therapy

  8. Inpatient rehabilitation

  9. Memory care/nursing home expenses

  10. Maternity care/pregnancy expenses

Fidelity has put together a great HSA eligible expense guide to help out here.

And while you can use your HSA for a litany of expenses, this does not mean that everything you'd consider to be healthcare is eligible. Popular excluded items include nutritional supplements or weight loss programs not prescribed by a licensed and practicing physician.

As a reminder, your Health Savings Account can only be used to pay for or reimburse yourself for expenses incurred on or after the date your account was established. Depending on your state, this could either be the date you established or funded your account.

What if you use an HSA for unqualified expenses?

Using your HSA for unqualified expenses is a big no-no. Doing so will lead to a steep tax penalty of 20%, plus income taxes for those under age 65.

Essentially, through this rule, the government removes any incentive or motive to use your account for anything other than qualified medical expenses. Furthermore, using your HSA for unqualified expenses will lead to these dollars being reported to the IRS on tax form 8889.

For instance, if a 50-year-old takes $1,000 from an HSA in order to buy a new computer, he/she will have to report this $1,000 as taxable income and then pay an additional 20% tax, or $200.

But once you turn 65, this additional penalty disappears, but you'll still need to report distributions as income.

How to contribute to an HSA

Contributions to Health Savings Accounts may occur via payroll deduction or via electronic funds transfer (ETF). This means that your contribution limits mirror that of both workplace savings plans like 401(k)s, as well as individual account such as IRAs.

Making your contributions via payroll deduction tends to be a better decision, though. This is because you'll ensure that your contributions are made in the most tax-advantaged way. And while contributing to your HSA via ETF or wire will still help you lower your taxable income, these contributions will occur after you've paid miscellaneous other taxes, such as Social Security and Medicare.

You can actually make current year contributions to an HSA until April 15th (or tax day) for the previous year, similar to IRAs. I made retroactive 2022 contributions to my HSA in March 2023 once I realized that I owed the federal government on my taxes.

If you qualify for an HSA, your employer will have a process to help you establish your account. During that process, you'll find the portal or site that you need to use in order to set your contribution amount, which may be set for a set number of dollars or a fixed percentage of your paycheck.

Health Savings Account providers

Similar to how 401(k) plans work, there are a number of HSA providers on the market today. In most instances, you won't be able to choose your provider. Rather, you'll be eligible to open an account with whatever company your employer is contracted with. Some of the largest HSA providers on the market today:

  • HealthEquity

  • Optum

  • Fidelity Investments

  • HSA Bank

How I use my HSA to get rich

Most Americans associate HSA accounts with a way to cover medical bills while insured on a high deductible health insurance plan (HDHP). But as a strong and healthy twenty-six-year-old, I use mine completely different.

I actually treat my HSA as a quasi-retirement account. That's right - I use mine to save for retirement. Here's why.

Since I am healthy, my medical bills are very low at the moment. I don't have a ton of expenses other than copayments on prescriptions and appointments. And while these can be a little pricey while on a HDHP, I budget to pay them out of cash flow.

Doing so allows me to preserve my balance in my HSA and allow it to continue to accrue capital gains without being interrupted. I do this for two reasons:

  • First, I can afford these bills without my HSA.

  • And secondly, I want my HSA to be able to cover all of my medical bills come retirement time.

Just consider the premise of compound interest. Let's say you can afford to fund your HSA with $150 per month for the next thirty years. In the first scenario, you'll contribute the $150 each month, but use $50 of it for copays and other medical incidentals. And in the second scenario, you'll find a way to pay for those incidentals through your cash flow, allowing your HSA to continue to grow uninterrupted.

Assuming an annual rate of return of 8%, in thirty years, the first scenario will leave you

with $135,940, a nice chunk of change for sure. But scenario two, the one where you're able to find the $50 monthly from somewhere else, would leave you with $203,910, enough to cover a lot of future healthcare expenses!

This trivial $50 per month could be the difference between being able to afford the best healthcare in retirement or not, impacting your future savings by nearly $70,000!

Is an HSA worth it?

I believe that a Health Savings Account is unequivocally worth it, no matter what purpose you ultimately use it for. Remember - you can use your HSA to cover qualified medical expenses now. But I try to cover as many of these bills out of my cash flow as possible, since this money will be far more valuable in the future after being invested for years or decades.

But even if you decide to use your Health Savings Account to pay for your medical bills as they pop up, this is still an excellent idea. Since HSAs are triple tax-exempt (contributions, investment growth, and withdrawal), your contributions will be made on a pre-tax basis.

This means that, should you lose 35% of your total income to federal, state, and local taxes, you can effectively save 35% off your copays, prescriptions, and other medical bills that you use your HSA for.

I want to hear from you. Do you have an HSA? And if so, how do you use it?

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About Nathan Zarcaro

Nathan Zarcaro is the founder of The Student Debt Destroyer and is passionate about personal finance related causes.  A 2018 graduate of Providence College's Liberal Arts Honors Program, Nathan studied Finance, and has worked for industry leaders in both finance and healthcare.  In his free time, Nathan enjoys playing golf and traveling with his wife Brigid.

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