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Health Savings Account Planning

Seven tips for a sound strategy

Health Savings Accounts (HSAs) have quickly risen in popularity over the past few years. In a nutshell, an HSA is a tax-advantaged savings account that is owned by an employee or self-employed person. According to the America’s Health Insurance Plans (AHIP), enrollment in health savings account/high-deductible health plans (HSA/HDHPs) totaled 19.7 million in January 2015, up from 17.4 million in 2014.

Market forces are pushing employers and self-employed taxpayers to move to qualified high-deductible health plans. High-deductible health plans have lower premiums: which allow premium dollars to be better utilized, if moved to an HSA.

Some clients put the maximum amount of pre-tax dollars allowed by the IRS into their HSA each year. Whether it’s $500, $5000, or the maximum contribution allowed ($6750 for a family as of 2016), these contributions are going to a tax-advantaged account with unique benefits. The contribution is deductible. In addition, like a 401(k), income earned in the account is not taxed. However, unlike a 401(k), the contributions and earnings can escape taxes when withdrawn if they go toward qualified medical expenses. It may be more beneficial and strategic to max out HSA deposits before maxing out other non-tax advantaged retirement accounts. Some take it a step further and do not touch the money in their HSA, even for medical expenses, prior to age 65, so it can grow in the tax-deferred account.

  1. Max It Out. Medical expenses are subject to an income limitation, and many people fail to receive any benefit for medical expenses. The HSA, however, allows the taxpayer to move a deduction for medical expenses from Schedule A to a deduction of taxable income. In other words, an HSA deduction will reduce your taxable income, while medical expenses paid may not.

  2. Play Catch Up. Taxpayers over 55 can put an additional $1,000 into their HSAs. Taxpayers should strive to maximize the $1,000 for as long as possible and put in an additional $1,000 each year between 55 and 65.

  3. Two is Better Than One. Clients over 55 should open a “spousal HSA.” If one spouse has an HSA, the other spouse, if between the age of 55-65, can open a separate HSA in his/her name. Combined, the couple can put close to $8,000 into an HSA each year.

  4. The Ultimate One-Two Punch. Think of an HSA like the ultimate one-two punch. Not only does it allow you to put away pre-tax money to spend on future medical costs, but it also lets you grow that money via conservative investment vehicles. Ideally, the HSA investment options should feel very much like a 401(k) plan’s, where account holders select investment vehicles from a pre—determined – and hopefully well-vetted – bundle of mutual funds to grow your money.

  5. Save the Health Savings Money. This might be counterintuitive, but do not pay a dime of your healthcare expenses from your HSA until you are 65. Why? For the same reason you wouldn’t use your 401(k) savings to by a new car at 53. You’ll want to maximize the HSA’s ability to serve as a tax haven until you decide to pull the money out. Your strategy should be to grow the funds in the tax-deferred vehicle as long as possible.

  6. Reap the Benefits. After reaching age 65, start taking HSA distributions. Qualified medical expenses can be paid with this tax-free money. Remember, your prior medical expenses – expenses before age 65 – can also be reimbursed once you reach age 65.

  7. Be Selfish. HSA money isn’t meant to be handed down to your children. Couples should spend down their HSA in their lifetime. Upon the death of the second spouse, the HSA is taxable income to the beneficiary who receives the HSA. It is also included in your estate.

Bonus Tip: You can make a gift to another person’s HSA, just as you can with a 529 plan. What a wonderful birthday or holiday gift – truly a gift that could grow for a lifetime. If you have a child in need and want to help with their living expenses, this may be a wonderful planning opportunity.


The HSA tends to be an unserved tax-deferred vehicle in the investment world of taxpayers.The taxpayer builds funds in the HSA.HSAs are here to stay and likely will be expanded in the future; be sure to take advantage of this great tool to increase your nest egg and possibly reduce your tax liability now.

Adapted from article by Jeffrey J. Sauer, CPA


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