Money Matters

Do you know everything about HSA’s?

5 Apr 2017 by: jhurley 

Dating back to the early 2000’s, Health Savings Accounts (HSA’s), have become a popular strategy for paying for medical expenses. HSA’s are tax-advantaged medical savings accounts available to those enrolled in high-deductible health plans (HDHP’s). With rising medical expenses as well as the considerable challenges that the Medicare program is facing, medical expenses will continue to have a major impact on every American’s budget. (Please note that the HDHP/HSA combo may not be the right avenue for your family if you tend to have high out of pocket health care expenses.)

Let’s look at some of the advantages that an HSA provides:

HSA’s provide a triple tax benefit  

  1. Your contributions are tax deductible if you contribute to an HSA through your paycheck, they are pre-tax.
  2. Contributions are invested based on options available to you in your plan and any earnings are tax-free.
  3. If withdrawals are used for qualified medical expenses for you, your spouse or your dependents, they are tax-free. The preferential tax treatment of HSA’s is among the best available in the current tax code!

There is no “use it or lose it” with HSA’s

Sometimes HSA’s can be confused with FSA’s (Flex Spending Accounts). Unlike FSA’s, an HSA allows unused funds to be carried over year after year. Additionally, employer-sponsored plans can offer an additional incentive by contributing to your HSA on your behalf. It’s like getting free money! And if you leave the workforce or change jobs, your HSA is “portable,” meaning it will stay with you, like a 401(k). Be sure to check with your benefits administrator on specific rollover rules.

You can start saving for the future

Per an article by financial expert Ed Slott, saving for medical expenses should be viewed as a critical part of saving for retirement.  You can build a medical expense “nest egg” that complements your traditional retirement savings. There are limits to how much you may contribute each year; however, if you have extra cash, you may consider either starting to fund an HSA and/or contributing more than you expect to spend on medical expenses in a given year. The 2017 maximum annual contribution limits are $3,400 for individuals and $6,750 for families. If you are age 55 or older, you can contribute an extra $1,000. Additionally, there are no income limits to be eligible to contribute to an HSA. Per the article, a recent study by the Employee Benefits Research Institute found that some couples would need to save almost $350,000 to cover medical expenses during retirement!

You can still use HSA money after you are eligible for Medicare

When you reach age 65 and enroll in Medicare, you can no longer contribute to an HSA since Medicare is not an HDHP. However, you may continue to use the HSA money to pay for qualified medical expenses and can enjoy expanded benefits. You can use the tax-free money from an HSA to continue to pay for out of pocket medical costs including Medicare premiums (except for Medigap premiums).

You have options

First, you always have the option to withdraw money from your HSA for any reason; however, there may be consequences. Typically, if the money is not used for qualified medical expenses and you are not yet age 65, you will be subject to a 20% penalty and any earnings would be taxable. The good news is if you are over 65 and you use HSA money to pay for something which is not medical related, although it will be taxable, the 20% penalty is waived!


With the near extinction of high paying pension plans in retirement, rising medical costs, and longer life expectancies, contributing to an employer retirement plan may not be enough for a financially healthy retirement. If you have extra cash and you think that an HSA may be a good option for you, you may want to consider allocating some of your cash to an HSA to complement your retirement savings. Please note that HSA rules are complex. To maximize your HSA benefits and to avoid costly mistakes, consider discussing this with a trusted advisor such as a fee-only CFP®.

CCMI provides personalized fee-only financial planning and investment management services to business owners, professionals, individuals and families in San Diego and throughout the country. CCMI has a team of CERTIFIED FINANCIAL PLANNERTM professionals who act as fiduciaries, which means our clients’ interests always come first.
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