You’re Probably Using Your HSA Wrong

Mar 26, 2024

If you use your health savings account (HSA) to cover real-time healthcare expenses but you could afford to pay them from your general savings, you might want to reconsider your approach. This blog post explains where many go astray with the HSA and what to do instead to maximize its perks.

I led with a bold accusation, but I can back it up. 

A 2023 benchmarking survey of HSA account usage found that the average participant annual contribution was $2,323. Meanwhile, the average account balance was just $6,130 at the end of 2022. Considering the maximum an individual could contribute in 2021 was $3,600, I’d expect these balances to be higher if users were making the most of their HSAs.

Low balances indicate two party fouls:

  1. Most account holders aren’t contributing the max to their HSA
  2. Most account holders are probably using HSA assets to cover ongoing, routine healthcare expenses

Not only is your average person not filling their HSA up, but we’re also turning around and quickly spending these very special dollars before they can grow. Given that the HSA is draped in top-notch tax benefits, you want to prioritize filling up this account. Then, let the investments do their thing. 

In fact, HSA tax perks are so good that the only priority I’d rank above putting money in one is getting your 401(k) match. 

HSA Basics

A health savings account (HSA) is a tax-advantaged investment account used to save and invest for healthcare expenses. In any year you’re covered by a high-deductible health insurance plan (HDHP), you’re eligible to contribute to one.

(Note: if you switch to insurance that’s not high-deductible, you can still keep your HSA invested; you just can’t contribute new money during that year.)

In 2024, the contribution limit is $4,150 for an individual and $8,300 for a family. Plus, if you’re age 55 and older, you can contribute an extra $1,000.

The HSA has been #blessed by the tax gods. It comes with what’s known as the Triple Tax Benefit in the personal finance community. You get a tax deduction in the year you contribute to one, tax-deferred growth while money’s in the account, and then tax-free withdrawals for qualified medical expenses.

Effectively, it’s a completed circuit of earning money → investing it → spending without ever paying federal taxes. The more money you can funnel into this virtuous cycle and the longer you can leave it there, the better.

This is unicorn money.🦄

Here’s how to optimize your HSA strategy.

To start, let’s keep it simple. 

Point-blank, invest as much as you can in your HSA each year and then don’t touch it. When you can swing it, use the money in your checking account to cover routine healthcare expenses instead.

I’d actually prioritize maxing-out your HSA before general retirement accounts, like your 401(k) and IRA. Really, if you want to maximize free money and tax perks, the only thing that should trump it is your 401(k) match. Knowing how high this account sits in the account hierarchy is yet another indication folks aren’t using it to its fullest extent.

Money in your checking account, on the other hand, is valuable but not special. There’s no limit to the amount that you can place in your bank account, there will always be more coming in, and it’s already been taxed. That’s why you want to use it instead of your HSA assets.

Save healthcare receipts and reimburse yourself (much) later.

I’d classify this as a “hack.” As long as you save receipts from medical care, you can reimburse yourself at any time. That could be now. It could also be 20 years in the future. You have full control of when you withdraw the money, which gives you a lot of optionality.

Here’s an example of how I’m using the “delayed reimbursement” technique to access tax-free money when I need it. Almost two years ago, I had Lasik eye surgery that wasn’t covered by my insurance. I paid out of pocket for the entire procedure, which cost $3,850.

I’m yet to reimburse myself from my HSA, but I’ve saved receipts to do so in the future. (They’re mounted in my office in one of those boxes that say IN CASE OF EMERGENCY, BREAK GLASS.)

If I ever find myself in a position where I’d need a pool of money – perhaps for a larger purchase, like a home – I could withdraw the amount from my HSA to reimburse myself for the surgery. There’s no statute of limitations on reimbursing yourself, making this a nice safety net if I need some extra future flexibility.

Is an HSA just for healthcare expenses?

Yes and no.

Prior to age 65, any money you withdraw from an HSA must be used for eligible healthcare expenses. Using the money for purposes outside of healthcare expenses before 65 would trigger taxes and a steep 20% penalty. You want to avoid this at all costs because it could effectively halve the amount you walk away with.

After you reach age 65, the HSA gets more flexible. You can still use the money fully tax-free for medical expenses just the same, but now you can also withdraw assets penalty-free to be used for any purpose. You will, however, owe income taxes on withdrawals used for expenses outside of healthcare. 

Effectively, your HSA morphs into a Traditional IRA at age 65.

You’re not crazy; it’s confusing.

My hunch is that most of our HSA choices are made from a lack of awareness, not necessity. You probably had no problem floating the $37 to put an end to your family’s burgeoning pink-eye-for-the-holidays tradition. 

But it’s no wonder we’re all confused. Between HSAs, HRAs, FSAs, and DCRAs, there are enough workplace saving and spending accounts that HR doesn’t even know which is which.

Thinking back to my own first encounter with an HSA in my 20s, when I didn’t work in the financial planning industry yet, I committed both of the aforementioned party fouls. My gut-reaction financial strategy was to contribute enough to cover my deductible that year. (‘Gut reaction’ and ‘financial strategy’ in the same sentence never ends well.)

Afterall, I was young and healthy. How much more could I need? But my method completely overlooked the long-term growth benefits of the HSA, which are actually the entire point of using one. 

Given that I’m reasonably sharp but just didn’t have the technical financial planning knowledge yet, I’d wager my approach was pretty close to what a reasonable person would do…who hasn’t read this blog post.😊

In years that you’re covered by a HDHP…

  1. Max out your HSA through paycheck deductions
  2. Make sure your money’s invested
  3. Don’t touch it for years to come
  4. Spend bank account money on healthcare expenses instead
  5. Amass a pool of tax-free money to pay for your old, achy bones in retirement

Madi 🫡


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial advisor.


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