Strategies for Use of Health Savings Accounts

Health Savings Accounts (HSAs) are an increasingly popular way to pay for healthcare expenses, especially as employers continue to look to shift ever rising insurance costs onto their employees.  Why are they popular? Because they are a fairly easy way to save for medical expenses while reducing your taxable income at the same time.

General Rules for Health Savings Accounts

So how can you qualify for an HSA? If you are enrolled in a high-deductible health insurance plan (HDHP) as defined by the government, you can qualify for an HSA. For 2021, the Internal Revenue Service (IRS) defines a HDHP for an individual as a plan with an out-of-pocket maximum of $7,000 ($14,000 for families) and a minimum deductible of $1,400 ($2,800 for families).

The concept behind an HSA is like an Individual Retirement Account (IRA), but designed for healthcare expenses. Employees direct pre-tax money into an account, it grows tax-free, and withdrawals used to pay for qualified healthcare expenses are not taxed.

You are reading that correctly; the money is never taxed. In fact, it is the only triple tax-advantaged savings vehicle of its kind (and it is even better if your HSA contributions are made via payroll deduction, then they would not be subject to FICA taxes (Social Security and Medicare) either). For 2021, someone with single coverage insurance can contribute up to $3,600 while those with family coverage can contribute up to $7,200. For those age 55 or older, an additional $1,000 catch up contribution can be made.

If you use the money in an HSA for non-eligible expenses, you will pay income taxes on that amount, plus a penalty of 20% if you are under age 65. This is like the early-withdrawal penalty of an IRA, where money withdrawn from the account is taxed, plus a penalty of 10% is applied if you are under age 59 ½.

Long-term Use of an HSA

At death, if a spouse is the beneficiary of an HSA, he or she can maintain the account as an HSA and continue to take advantage of the tax benefits. However, if someone other than the spouse is the beneficiary (a child for example), the inherited amounts are fully taxable to the beneficiary (so you may want to consider spending down an HSA before spending down other tax-advantaged accounts, like a Roth IRA, if possible).

Unlike a Flexible Spending Account, your HSA contributions are not “use or lose” as the balance carries over from year to year. Once you reach age 65 and enroll in Medicare, you can no longer contribute to an HSA, but you can still use the money accumulated for qualified healthcare expenses.

The definition of a qualified healthcare expense is available on the IRS website ( in Publication 502 “Medical and Dental Expenses.” Although not an all-inclusive list, and you should consult with your tax advisor about your specific situation, the following types of expenses would generally be allowed:

·         Acupuncture ·         Eye Exam ·         Organ Donors
·         Alcohol Treatment ·         Eyeglasses ·         Osteopath
·         Ambulance ·         Eye Surgery ·         Oxygen
·         Annual Physical Examination ·         Fertility Enhancement ·         Physical Examination
·         Artificial Limb ·         Service Animal ·         Pregnancy Test Kit
·         Artificial Teeth ·         Health Maintenance Organization (HMO) ·         Prosthesis
·         Bandages ·         Hearing Aids ·         Psychiatric Care
·         Birth Control Pills ·         Hospital Services ·         Psychoanalysis
·         Body Scan ·         Insurance Premiums ·         Psychologist
·         Braille Books and Magazines ·         Laboratory Fees ·         Stop-Smoking Programs
·         Breast Pumps and Supplies ·         Lead-Based Paint Removal ·         Surgery
·         Chiropractor ·         Learning Disability ·         Therapy
·         Contact Lenses ·         Long-Term Care ·         Transplants
·         Crutches ·         Medicines ·         Vision Correction Surgery
·         Dental Treatment ·         Nursing Home ·         Weight-Loss Program
·         Diagnostic Devices ·         Nursing Services ·         Wheelchair
·         Drug Addiction ·         Operations ·         X-ray
·         Drugs ·         Optometrist


Although HSAs are designed to cover the costs, as incurred, for the types of medical expenses listed above, because of the tax benefits – tax-free contributions, tax-free compounding, tax-free withdrawals for qualified healthcare expenses – there is another strategy to consider, and that is using the account as a long-term investment vehicle. Since you decide when you would like to get reimbursed from the HSA for qualified medical expenses, if you can afford to pay annual healthcare expenses out-of-pocket, you can leave HSA assets in place to grow over a long period of time.

Using this strategy, you will have some long-term recordkeeping to do with an HSA account. In retirement (which could be many years from now), to the extent of your receipts for qualified healthcare expenses paid over the years but never reimbursed by your HSA, you can take tax-free withdrawals from your HSA to spend however you wish. You may want to consider making digital copies in case you damage or lose the physical copies.

If the account grows larger than the amount of receipts you have accumulated, then it is no different than a traditional IRA and taxes would be due on the amount of any withdrawal (but no penalty would be due if over age 65).

I am not suggesting that we should all ditch our current health insurance coverage to switch to a HDHP with an HSA, but doing the math may make some sense. Further information on Health Savings Accounts is also available on the IRS website in Publication 969 “Health Savings Accounts and Other Tax-Favored Health Plans.”


Updated July 2021


Wealthspire Advisors LLC is a registered investment adviser and subsidiary company of NFP Corp.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, Certified Financial Planner™, and CFP® (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
This information should not be construed as a recommendation, offer to sell, or solicitation of an offer to buy a particular security or investment strategy. The commentary provided is for informational purposes only and should not be relied upon for accounting, legal, or tax advice. While the information is deemed reliable, Wealthspire Advisors cannot guarantee its accuracy, completeness, or suitability for any purpose, and makes no warranties with regard to the results to be obtained from its use. © 2023 Wealthspire Advisors
Bill Schwartz

About Bill Schwartz, CPA, CFP®

Bill Schwartz is a managing director in our Potomac, Maryland office.

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