Health Savings Accounts and Investing

A health savings account, or HSA, lets you set aside money for certain medical costs, including deductibles, coinsurance, copayments and other qualified expenses. Most health savings accounts cannot be used to pay for insurance premiums.

The money you and your employer put into your HSA is not counted as income for tax purposes, so you maximize your investment in the account while avoiding income taxes on your contributions.

HSAs are only available to people who have high-deductible health insurance plans. The Internal Revenue Service defines high-deductible plans as having a deductible of at least $1,600 for an individual or $3,200 for a family in 2024.

High-deductible plans usually charge higher deductibles in exchange for lower monthly premiums. Somewhere between 23 million and 36.8 million Americans — employees and their dependents — were covered by high-deductible policies in 2018, according to the Employee Benefit Research Institute.

To qualify for an HSA, you first have to be enrolled in a high-deductible health plan. You’ll have to open a separate health savings account.

You may be able to set up an HSA through your employer if your job offers one. If it doesn’t, you may find plans in the health care marketplace or through health insurance companies. You may also be able to set up an HSA through your bank.

Once you enroll in an HSA, you will receive a debit card or checks you can use to pay for qualified medical expenses your insurance does not cover.

How you deposit contributions to your HSA and banking services to monitor and maintain your account can differ depending on the insurer or financial institution you choose.

A health savings account can give you immediate tax advantages while allowing you to build substantial savings to pay for medical expenses throughout your career and into retirement.

HSAs have become a popular retirement planning tool because of their tax advantages and investment potential since they first became available in 2004. By the end of 2018, there were 9.8 million HSAs in the United States worth $22.8 billion, according to the Employee Benefit Research Institute (EBRI).

Unlike a flexible spending account, or flex account, money left in your HSA at the end of the year can be rolled over into the next year. EBRI estimates that 93 percent of HSAs ended 2018 with money left to roll over for future medical expenses.

Over the course of your career, annual rollovers could add up to substantial savings.

There are several investment strategies for getting the most out of your health savings account.

Taking advantage of these strategies requires you to consider your HSA as one element of your retirement planning toolbox rather than just a way to cover unexpected medical expenses.

Maxing out your HSA contributions before you turn 65 is one of the ways to grow your account. Your contributions are tax deductible or tax free, depending on your plan, until you sign up for Medicare.

You are allowed to contribute up to $4,150 a year for self-coverage or up to $8,300 for family coverage in 2024. The maximum amount may be adjusted for inflation each year.

If you can pay for medical expenses without touching your HSA, you will improve the account’s potential for growth toward retirement.

Also be aware that if you spend any money from your HSA on anything that is not a qualified medical expense under your plan, you will have to pay a 20 percent penalty and income tax on the money you withdraw.

Unlike a standard low-interest savings account, some HSAs allow you to invest in mutual funds, individual stocks or exchange-traded funds (ETFs).

Any profits you make from these investments are tax-free, so long as you use them to pay for qualified medical costs.

Contributions to an HSA set up through your employer can come from you, your employer or both. Any contributions from your employer do not count as income, so it’s not taxed. Like employer contributions to a 401(k) plan, this is like receiving free money.

If you’re 55 or older, you can take advantage of catch-up contributions as you get closer to retirement. This allows you to contribute an extra $1,000 a year. Your spouse can also contribute an extra $1,000.

You can no longer make tax-free contributions to your health savings account for up to six months before you sign up for Medicare.

You should take this into account if you plan to work past your 65th birthday. If you are new to Medicare and decide to keep your group health insurance through your job while enrolled in Medicare, you will be hit with a tax bill for your HSA contributions.

But you can use the money you’ve saved in your HSA to cover medical expenses Medicare does not.

You cannot use money from your HSA to pay premiums for Medicare supplemental insurance, also called Medigap. This is not considered a qualified expense and will result in a 20 percent penalty, and you’ll have to pay income taxes on the money you use to make the payment.