The Best Way to Use Your HSA
Ask most people what their HSA is for and they’ll say copays. They fund it with a few hundred dollars, spend it on prescriptions and urgent care visits, and start over the next January. That’s a fine way to use the account. It’s also the least valuable way.
Three tax breaks, one account
Money goes into an HSA before tax. It grows without being taxed along the way. It comes out tax free when it’s used for qualified medical expenses. No other account in the tax code does all three. A traditional 401(k) gives you the first two. A Roth gives you the last two. The HSA gives you all of them, as long as the money eventually pays for medical care.
And medical care is not a small line item over a lifetime. Health costs in retirement are one of the larger expenses most households face, and they arrive after the paychecks stop. An HSA that has been funded and invested for fifteen or twenty years is built for exactly that.
How to use it well
Fund it fully if your cash flow allows. Open enrollment is when most people set the contribution amount, and the default is usually low. Many employers add a contribution of their own, and that money counts toward the annual limit.
Invest it once you have a cash cushion. Most HSA providers hold contributions in cash by default and let you invest above a threshold. Money that sits in cash for twenty years isn’t doing the job. Decide on a cushion that covers a year of expected out of pocket costs and invest the rest.
Pay today’s bills another way if you can. This is the step that feels backward. If your household can cover routine medical costs from the checking account, do that and let the HSA keep growing. Keep the receipts. Qualified expenses can be reimbursed from the account later, and there is no deadline on when you take that reimbursement, as long as the expense happened after the account was opened. A folder of receipts becomes a tax free withdrawal you can take in any year you choose.
What changes at 65
Once you enroll in Medicare you can no longer contribute to an HSA, so the funding window has an end date. The account itself keeps working. Withdrawals for qualified medical expenses stay tax free, and that includes Medicare premiums for most parts of the program. After 65, withdrawals for anything else are taxed as ordinary income with no penalty, which makes the account behave like a traditional IRA for non-medical spending. Either way, the money is useful.
The retire before 65 case
For energy professionals planning to leave before 65, the HSA has a specific job. The years between your last paycheck and Medicare are the years you’ll pay the most for coverage, and an HSA balance built during your working years can pay for a good share of it.
Where to start
Two questions. Is your HSA contribution set at the level you actually want for next year, or at the default? And is the balance invested, or sitting in cash? Both are usually fixable in ten minutes on the provider’s website.
If you’d like to talk through how the HSA fits with the rest of your plan, Let’s Talk.
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