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Are You Taking Full Advantage Of Your Health Savings Account?


This article, reprinted below from the February 2014 newsletter, was entirely devoted to the Triple Tax Advantages of health savings accounts.  The Wall Street Journal has touted the HSA benefits exceeding benefits offered by 401(k) accounts.  Morningstar has reported that many health savings account owners fail to take advantage of the benefits that the account has to offer.  Are you one of those individuals?  Read further to find out, and call us to discuss any questions you may have.

Failure to take advantage of the health savings account benefits can be grouped into three distinct areas: failure to invest the account balance, failure to maximize your contributions, and being caught by behavioral missteps.  Ensure that you are taking full advantage of your health savings account.  Discuss it with us by telephone or during your 2017 tax preparation appointment.

Invest the account balance

Health savings accounts allow their account owners to invest the balance in marketable investments once the account reaches a minimum value.  By investing all or a portion of the account balance, the account holder hedges against inflation and hopes to take advantage of investment returns.


Account holders should aim to contribute the statutory maximum to their health savings account each year and pay for out of pocket medical expenses with other available funds.  This, combined with an investment of the account balance, will enable the account to have the chance to grow over time.

Behavioral missteps

The value of health savings accounts suffers because account holders do not place importance on saving for medical expenses, or using the account to save for retirement, as discussed in our February 2014 newsletter.  Additionally, account holders withdraw funds to pay for out of pocket medical expenses that can be paid with other available funds. 

The Importance of Keeping Receipts

A health savings account, or HSA, has the power to be a valuable source of tax-free retirement income.  In fact, it may be the most valuable retirement vehicle that you could have access to because you have the ability to:

      • Make deductible contributions
      • Grow the funds tax-free 
      • Withdraw the funds tax-free.

The Roth IRA, which is considered a valuable retirement savings vehicle, is characterized by only two of those features.  It does not allow deductible contributions.

Are you asking yourself ‘How am I able to take advantage of this?’  We will tell you.  Most importantly, you must be covered by a high deductible health insurance plan in order to open a health savings account.  The most common use of the health savings account is to pay for medical expenses in a high-deductible health insurance plan.  However, you do not have to use the account for this reason. 


When you contribute money to a health savings account, you receive a tax deduction for the money contributed.  A taxpayer under age 55 who is covered under a single plan can contribute up to $3,450 for the 2018 tax year.  Contributions must be made by April 15, 2014.  A taxpayer over age 55 can contribute an additional $1,000.  A taxpayer under age 55 who is covered under a family plan can contribute up to $6,900, with an additional $1,000 available to taxpayers over age 55.

Spender vs. Saver

Health savings account spenders use the funds in their health savings account to pay for medical expenses that they incur during that year or years near in time to the year of contribution.  However, you can be a health savings account saver, in which you contribute funds to your account each year and allow those funds to grow within the account.  Many health savings account custodians offer an investment feature in which you can use the funds to invest in securities in the stock market.  By investing the funds, your account has the opportunity to grow tax-free.  HSA Bank is one such custodian that offers this feature.  HSA Bank account owners can open a TD Ameritrade investment account and transfer funds from their HSA account to TD Ameritrade to be invested.  There is no minimum HSA balance to enable this investment feature.  However, if your account balance is less than $4,925, you will incur a $3 monthly investment fee.


At this point in our analysis, we have contributed to the account, obtained a tax deduction and explained how the account can grow beyond the minimal interest rate offered on the cash balance.  But how can the withdrawals be tax-free at any given point in time?  Let’s hypothetically say that an initial $3,250 contribution by a taxpayer at age 35, who was covered under a high deductible health insurance plan only in 2013, has grown at 7% each year and will be worth approximately $26,000 when the taxpayer reaches age 65.  Each year, between age 35 and the time of withdrawal at age 65, that individual must pay for their medical expenses with funds outside of the HSA account.  Additionally, to take advantage of this HSA feature, the taxpayer would not have been allowed to claim a Federal or state medical expense deduction during those years.    Under current tax laws it is particularly difficult to obtain a Federal medical expense deduction because the expenses in any given year must exceed 10% of a taxpayer’s adjusted gross income.  If those medical bills incurred between this taxpayer’s ages of 35 and 65 cumulatively exceed the value of the account balance at age 65, the withdrawals, made for retroactive claims, would be tax-free.   This brings us to the title of this article ‘The Importance of Keeping Receipts’.  At age 65, the taxpayer would not be able to substantiate his cumulative medical bills without receipts.   Each year, beginning with the year the HSA account was opened, the taxpayer would have had to save the receipts for those medical expenses that were paid for with out of pocket funds.  When the money is taken out, the withdrawal is matched against receipts that equal or exceed the distribution amount. 

If the taxpayer does not want to wait as long as thirty years, as shown in this example,  the matching of cumulative receipts with a withdrawal can take place at any time. 
What medical expenses are included?

The eligible medical expenses include co-payments, prescription costs, eye care, chiropractic work, dental work, orthodontic work among others.  Additionally, if you have a medical condition that requires specific equipment prescribed by a doctor, those expenses would be included as well.  The expense that cannot be included is the premium paid for the high deductible health insurance policy. 

If I want to purse this strategy, what should I know in advance?

Employer Match – If you cannot afford to maximize your contribution to both your 401(k) retirement account and your health savings account, ensure that you contribute enough to both to take advantage of any match that your employer offers.

Saving Receipts - We recommend a simple shoe box or envelope method (one envelope per year of receipts).   If your unreimbursed medical expenses generally are as large as your contributions, you can consider your HSA account to be an emergency fund.  This is because you can take a distribution at any time, free of tax, if you are able to match it against receipts.

Investment Options – Look into the investment options offered by the plan your employer offers.  If you are not satisfied with these options you can transfer the funds using a trustee-to-trustee transfer to a bank with better options.

If you have questions about any of the topics discussed in this newsletter, please feel free to call us. 


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