Tips for how your HSA can pay for healthcare expenses plus also help you meet your financial goals!

HSAs have unique advantages that make them great for any financial goals you have, including paying for everyday healthcare expenses, starting an emergency savings or contributing to your retirement income. In this article, we will review the benefits of an HSA and steps you can take to accelerate your savings.

How an HSA can help you meet your financial goals

Triple tax advantages

HSAs qualify for tax-free contributions, tax-free growth, and tax-free distributions when used for qualified medical expenses. This is a unique benefit to this account type.

Money you contribute to your account goes in tax-free. If your employer allows you to fund your account with payroll deductions, these deductions can be taken pre-tax, so not only are you increasing the balance in your account, you’re also increasing the amount of take-home pay on each check. Also, if your employer makes contributions to your account, you can receive that money tax-free as well. If you are not able to use payroll deductions to fund your account, you can still make deposits directly and deduct the contributions on your taxes. 

In addition to the tax-free contributions, any earnings you receive in your account are also tax-free. Many HSAs allow earnings in a couple of ways. First, many HSA administrators will pay interest on the balance you maintain in your account. These interest payments are tax-free to you and can help increase your balance a little each month or quarter. Another way to generate earnings on your HSA funds is investments. Many HSA administrators offer a selection of investment options to allow you to choose the right options for you. HSA investments are subject to the same risk as other investments, so it isn’t guaranteed that your balance will increase. Be sure you understand the benefits, costs and risks before investing your HSA funds.

The third way your HSA is tax-free is when the money is spent. When you use the money to pay healthcare expenses or pay yourself back for expenses you paid out of pocket, you receive the money tax-free. 

Generous contribution limits

Just like you see with other tax-favored accounts, the IRS sets a limit for how much you can contribute to the account each year. However, the limits are generous enough to build a significant balance. If you start contributing the maximum allowed by the IRS today (which is $8,300 for 2024), and you saved that every year earning a 5% annual rate of return, in 30 years you could have more than half a million dollars in your HSA.

Want to model your own savings scenario? Try My HSA Planner. The My HSA Planner tool walks you through a questionnaire about your healthcare coverage, healthcare expenses and your financial goals to create your individual savings goal and you can adjust the variables to see projected outcomes. It’s free for anyone to use, even if you’re not an Associated Benefits Connection participant.

No use-it-or-lose-it rule

All funds contributed to the HSA belong to you on day 1—whether contributed by you or someone else. With some other accounts, like a 401(k), it’s not uncommon to see a schedule where only a certain percentage of the money is really yours until you complete a certain length of service, often up to five years. Not with an HSA! The money in your account is yours – today, tomorrow and forever until you’re ready to use it.

HSAs don’t have many of the have deadlines and penalties you see in other tax-favored accounts. For example, there is no deadline to spend the money in the account and no use it or lose it rule like you see with Flexible Spending Accounts (FSAs). Also, there are required minimum distributions and no penalties for taking the money out too early or too late like you see with Individual Retirement Accounts (IRAs).

How to accelerate your savings

Below is a list of strategies you can adopt to help accelerate your HSA savings.

Max out your contributions. The more you can add to the account, the faster it will grow. Even if you can’t afford to contribute up to the IRS maximum, any extra you can contribute each year will make a difference in the long run. 

Catch up on contributions. This one is a play on words. What we’re really talking about here is catch-up contributions. The IRS allows participants age 55 and older to make an extra contribution to their account above the usual maximum in order to boost their savings as they approach retirement. If you’re age 55 or older, or as soon as you’re age 55 or older, don’t miss out on this opportunity!

Contribute to the prior year. Let’s say you don’t max out your contributions this year. If early next year, you are looking for ways to save on taxes or find you have some money available, think of your HSA. If you make the contribution before tax day, which is usually April 15, you can make the contribution count toward the prior year so you can still fully fund in the new year. Just make sure to indicate that the contribution is meant to be a prior year contribution and make the contribution ON TIME.

Invest your assets. If your HSA administrator has this option available, consider investing a portion of your HSA funds for the potential of greater returns. And, since HSA funds grow tax free, the money can grow even more. As with any investment, this is subject to market risk and there is no guarantee of returns, so be sure you understand the risks before you begin investing. 

Enroll in a Limited Purpose Flexible Spending Account (LPFSA). If you are employed and your employer offers a limited purpose flexible spending account, consider enrolling. The LPFSA was specifically designed to allow participants to also use an HSA. A limited purpose flexible spending account allows you to use tax-free dollars to pay for dental and vision care expenses that you might otherwise have used your HSA to pay. LPFSA plans have a use-it-or-lose it rule, so be sure to use all the money each plan year. This gives you the best of both worlds – tax savings on healthcare expenses today and increased HSA savings for tomorrow. 

Know your expenses. Make sure you know which expenses the IRS considers eligible for reimbursement from your HSA to avoid having to pay taxes and penalties on amounts you withdraw. Your administrator will likely have educational materials and other tools to help you better understand which expenses are qualified expenses based on IRS rules.

Delay reimbursements. There is no deadline to withdraw money for an eligible expense which means that you can pay your expenses out of pocket and reimburse yourself at any time in the future. This will allow you to keep more money in your HSA and enjoy the benefit of compound earnings.

Rollover an IRA. The IRS allows you to roll money from an IRA into your HSA one time in your lifetime. This one is more complex, so be sure you’re getting the advice of a qualified financial planner and/or tax advisor if you want to evaluate whether this is a good option for your situation. 

 

Review your HSA contribution strategy today!

Are you getting everything from your HSA you could be? Now is the time to examine your HSA contribution strategy to make sure it still meets your needs. Also, be sure to discuss your strategies with your financial advisor as part of your overall financial plan. And, don’t forget to perform regular check-ups, especially as you have significant changes in your life such as job changes, pay increases, marriage and/or birth or adoption of children. 

If you have any questions about HSAs, or if you’re considering opening a new account, please call our Participant Services at 800-270-7719, schedule an appointment online or visit us at any of our Associated Bank locations.

Opening a new HSA doesn’t have to be difficult, and our team is here to help.