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How to Hack Your HSA

How to Hack Your HSA


Since it’s that time of year again when many people are able to make changes to their health insurance plans, I wanted to revisit the Ultimate Retirement Account (i.e. Health Savings Account).

Rather than simply link to last year’s post (which you should definitely check out if you haven’t already), I decided to use what limited artistic ability I have to make a graphic that describes how to best use an HSA for tax-avoidance purposes.

How to Hack Your Health Savings Account
Click image to enlarge

If you’d like to share the image, feel free to embed it on your website using the following code or share it on social media using the various buttons at the bottom of the post.

Max Out Contributions

Decrease your tax burden by contributing the maximum amount to your HSA each year and increase your savings rate by investing the tax savings.

Assuming you are in the 25% tax bracket, maxing out your HSA could save you over $800 in taxes each year.

Payroll Deduction

When you contribute to your HSA via an automatic payroll deduction, you are able to avoid paying FICA taxes (i.e. Social Security and Medicare) on your contributions.

Assuming you max out your HSA, this could result in an additional $248 of savings per year.

Invest

Rather than treat your HSA as a savings account, instead treat it as a retirement account and invest the entire HSA balance in low-cost index funds (note: not all HSA custodians offer low-cost index funds so make sure yours does before opening an account).

Medical Expenses

Rather than use your HSA to pay for medical expenses, instead use your after-tax money so that you can leave your HSA money to grow tax free.

Receipts

Keep track of all your medical receipts so you know how much you are able to withdraw from your HSA.

As you incur qualified medical expenses, you increase the amount that you can withdraw during early retirement (you effectively convert your HSA into an early-retirement Roth IRA over time).

Bonus: To keep track of how much of your HSA can be withdrawn immediately, click here to download a free copy of the spreadsheet I used on my own journey to financial independence!

Retirement

Assuming you reach the age of 65 and have not accumulated enough medical receipts to fully liquidate your account, the HSA can be used for ordinary expenses in the same way that a Traditional IRA can be used for any expenses after standard retirement age (note: withdrawals for qualified medical expenses will continue to be tax free but withdrawals for all other expenses will be taxed as income, just as Traditional IRA distributions are taxed).

Conclusion

By treating your HSA as a retirement account instead of a savings account for health-related expenses, you can use it to further reduce your tax burden during your working years, shelter more of your investment earnings from tax, and potentially provide a source of tax-free income during your early retirement years!

113 comments for “How to Hack Your HSA

  1. Mark W
    November 7, 2013 at 11:02 am

    Can you recoup the cost of a medical expense at any point? For example, I have $200 in medical expenses in 2013. Can I withdraw $200 in 2020, or can it only be current year expenses?

    • The Mad Fientist
      November 7, 2013 at 11:18 am

      Hi Mark,

      There doesn’t seem to be anything in the documentation that specifies when you need to reimburse yourself for a qualified medical expense so that’s why I recommend leaving your money in the HSA as long as possible (so that it will continue to grow tax free).

      To answer your specific question…yes, I would withdraw that $200 in 2020 instead of 2013 (or even later, if you don’t actually need that $200 in 2020).

    • November 7, 2013 at 12:34 pm

      Mark, you can defer withdrawals.

      See here: http://www.irs.gov/irb/2004-33_IRB/ar08.html
      An account beneficiary may defer to later taxable years distributions from HSAs to pay or reimburse qualified medical expenses incurred in the current year as long as the expenses were incurred after the HSA was established.

      • The Mad Fientist
        November 7, 2013 at 4:10 pm

        Great find, Jeremy! I had read through all of the official documentation but I never came across the Q&A Bulletin you linked to. It is great to see the IRS explicitly state that reimbursements can be deferred to future tax years.

        For those interested in the full question and answer in the document…

        Question: When must a distribution from an HSA be taken to pay or reimburse, on a tax-free basis, qualified medical expenses incurred in the current year?

        Answer: An account beneficiary may defer to later taxable years distributions from HSAs to pay or reimburse qualified medical expenses incurred in the current year as long as the expenses were incurred after the HSA was established. Similarly, a distribution from an HSA in the current year can be used to pay or reimburse expenses incurred in any prior year as long as the expenses were incurred after the HSA was established. Thus, there is no time limit on when the distribution must occur. However, to be excludable from the account beneficiary’s gross income, he or she must keep records sufficient to later show that the distributions were exclusively to pay or reimburse qualified medical expenses, that the qualified medical expenses have not been previously paid or reimbursed from another source and that the medical expenses have not been taken as an itemized deduction in any prior taxable year.

        • Adam
          January 14, 2014 at 10:05 pm

          I’m a little worried about the last little bit of the rules you quoted there. Specifically: “that the qualified medical expenses have not been previously paid or reimbursed from another source and that the medical expenses have not been taken as an itemized deduction in any prior taxable year”. What do they mean “reimbursed from another source”? How do they expect me to have paperwork proving that something didn’t happen? Paperwork generally only shows things that did happen.

          Also, the general rule of thumb is to keep tax paperwork for the past 7 years. But it seems like if I have an HSA and plan not to reimburse myself from it for potentially 10, 20 years or more, then I need to keep all of my tax returns for that long as well, to prove I didn’t take those expenses as an itemized deduction at any time. That seems like quite a lot of paperwork to have to keep track of over ~40 years (I opened my first HSA at age 27).

          • The Mad Fientist
            January 15, 2014 at 9:23 am

            Hey Adam, I think all that’s saying is that you shouldn’t have any medical deductions on your tax returns that you later reimburse yourself for from your HSA. Just keep track of your medical receipts and tax returns and I imagine that will be sufficient documentation, should you ever get audited.

            As far as keeping track of your previous tax returns, I just plan to maintain electonic copies of everything forever so hopefully I’d have exactly what the IRS is looking for in an audit situation. Since electronic storage is cheap and plentiful these days, why not just save everything?

        • March 22, 2014 at 6:22 pm

          Further validation that you can postpone HSA withdrawals past the year you incur the costs.

          http://www.kiplinger.com/article/taxes/T056-C001-S003-reporting-hsa-contributions-on-your-tax-return.html?si=1

  2. November 7, 2013 at 12:44 pm

    Nice graph Brandon!

    Since the withdrawals from the HSA after age 65 are tax free for any purpose, should that last box say “At Age 65, Use HSA Like A ROTH IRA”?

    One of the things I’m most excited about is that the HSA reduces your Adjusted Gross Income for ACA purposes, allowing you to increase your ACA subsidy as well

    I haven’t done the math on that, but for individuals/families under 400% of the FPL this would be an additional savings beyond the income and FICA taxes. Win win!

    I believe also that unlike a Traditional or ROTH IRA, you don’t need “earned income” to make contributions to an HSA which will help us out

    • The Mad Fientist
      November 7, 2013 at 4:41 pm

      The withdrawals are only tax free if they are for qualified medical expenses. For ordinary expenses, you won’t be charged any penalties after the age of 65 but the distributions are taxed in a similar way distributions from a Traditional IRA are taxed after standard retirement age. I updated the post to clarify this point so let me know if it sounds okay to you.

      You’re absolutely right about the HSA lowering your AGI for ACA purposes and you are also correct that you don’t need to have earned income to make contributions. It really is the ultimate retirement account for early retirees, isn’t it?

      • November 7, 2013 at 7:25 pm

        Ahh, I misunderstood. I always thought I could buy a tax-free yacht with my HSA after I turned 65. Thanks for correcting me

        • The Mad Fientist
          November 7, 2013 at 8:00 pm

          Haha, I would love to see a post about buying a yacht with HSA funds. Make it happen!

    • Tyler
      March 26, 2015 at 4:00 pm

      You are exactly right just be careful if you are extremely low income that you don’t push yourself into the GAP. This can happen in states where they did not do the medicaid expansion as a result it could make it so you can no longer qualify for any subsidies on the exchange and you also don’t qualify for medicade. See the following site. With that said I doubt their are many with enough disposable income to accomplish this, unless of course they are savvy enough to understand that they should run all medical related expenses through the HSA even if they put it in and take it back out. It can also cause issues with HSA eligibility if you are leveraging silver cost sharing reductions on plans that say they are HSA eligible but become ineligible due to those reductions.

      http://kff.org/health-reform/issue-brief/the-coverage-gap-uninsured-poor-adults-in-states-that-do-not-expand-medicaid-an-update/

  3. 13owie
    November 7, 2013 at 1:51 pm

    Hi Mad Fientist, Good timing as you note. Our plans are switching 12/1 and HSA is now a better option than the PPO plan, so we’ll be opening one. I’ll try to get as much in Dec under ’13 limit as can. With who do you have your HSA, or who would you recommend now? I’ve been trying to pour through the # of different lists of companies out there and weigh the rates/fees/limits, etc. One thought is to just find best rate w/o fees and treat it as low risk piece of your portfolio and move $ elsewhere to more aggressive investments (fungible). But am interested in considering investing the HSA into index funds too if you have a recommendation; 2.02% APY looks to be the most I can find.

    Thanks!

    • The Mad Fientist
      November 7, 2013 at 8:02 pm

      My HSA is through Fidelity and I’ve been very happy with them so far. They offer a good selection of low-cost index funds to invest in and they are one of the ones I can contribute to through a payroll deduction.

      I believe http://www.hsaadministrators.info allow you to invest in Vanguard index funds but they do charge an annual fee.

      Do any readers out there have any other suggestions for 13owie?

      • November 9, 2013 at 1:19 am

        I’m looking also, now that our insurance will include an HSA again

        Best I’ve found (so far) is http://www.hsabank.com
        They have fees, but they are waived with reasonably small balances of around $3k afaik

        With hsabank.com, you can open a brokerage account at TD Ameritrade and invest in any mutual fund or ETF.

        All other options I’ve seen with the insurance companies we can use all have investment options, but they have bullshit funds with 3.5% front end loads and high expense ratios. It is for this reason that all of our current HSA funds have been in cash

        • The Mad Fientist
          November 10, 2013 at 6:34 pm

          Thanks for the recommendation, Jeremy. Since I’ve only used Fidelity, I haven’t had to shop around so I’m not really familiar with the other options out there. HSABank sounds like it could be a good choice though so let me know what you think of them if you end up going with them.

  4. Tom
    November 7, 2013 at 3:33 pm

    Hi Mad Fientist! What happens if I contribute more than the limit ($3250 for a single person in 2013)?

    I understand that only 3250 is tax deductible, but what would stop me from contributing $25,000 this year? It sounds like it would act almost like an unlimited Roth IRA provided I don’t withdraw until age 65. Thoughts?

    • The Mad Fientist
      November 7, 2013 at 8:08 pm

      Hi Tom, I like your thinking but you probably shouldn’t exceed the contribution limits.

      If you exceed the limits, you’ll be taxed on the excess and you’ll also possibly be charged an additional 6% excise tax.

      Also, as I mentioned to Jeremy in response to his comment, the HSA acts like a Traditional IRA after age 65 so you’ll be taxed on any withdrawals that aren’t used for qualified medical expenses.

  5. November 7, 2013 at 3:38 pm

    This is the first year we’re actually doing anything with Mr PoP’s HSA and I’m still working through all the details to do it right.

    You mention not paying FICA if we use payroll deductions for contributions, but I don’t see a way to select payroll deductions. Just one time or on a schedule straight from our checking account. Do you know if this is a requirement of all HSAs? I hate to bother his HR dept if they don’t offer it and Mr PoP avoids his HR dept like the plague.

    Also, do you know if the employer contributions count against what we can contribute up to the max? For instance, if his employer contributes $750 each year into his HSA, are our contributions then capped at $2500, rather than $3250?

    I know I’m a HSA newb – we mostly ignored it the first two years since we like paying med expenses out of my flex instead, but finally came around that it’s probably best to use it despite its annoyances.

    • The Mad Fientist
      November 7, 2013 at 8:09 pm

      Hey, good to hear from you, Mrs. PoP!

      You’ll likely have to talk to your husband’s HR department to see if an automatic payroll deduction is possible. I know talking to HR is usually a pain but the savings will definitely be worth it.

      To answer your question about employer contributions….yes, employer contributions do count towards your contribution limits. If your husband’s employer contributes $750 each year, he would only be able to contribute an additional $2,500.

      Glad you’re finally coming around to the idea of contributing to an HSA. Let me know if you have any other questions that I can help with as you look into it more!

      • November 7, 2013 at 9:26 pm

        Thanks! This was planned to be this weekend’s mission, but we’ll see what answer HR comes up with.

        I’m also under the impression that because Mr PoP’s HSA is through work we can’t switch which financial institution the HSA lives at (currently ChaseHSA). I’m putting it in the same category mentally as a 401K in that regard. Someone correct me if this is a wrong assumption as the investment options aren’t terrible, but the best is a SP500 tracking mutual fund that has a 0.20% ER, so if switching to another institution is an option I’d rather do it before getting everything else together.

        • The Mad Fientist
          November 8, 2013 at 7:48 am

          You’ll likely have to stick with ChaseHSA if you want to go the automatic payroll deduction route.

          A 0.20% ER for an S&P 500 fund is a bit high but your FICA reduction will more than compensate for the higher ER.

          Keep me posted on how it goes with HR!

          • November 11, 2013 at 1:58 pm

            Thanks for the timing of this post, seriously. We got the HR stuff worked out and it looks like if we keep this plan for the next 5 years until FI, your heads up on the payroll/FICA will have helped us avoid paying almost $1000 in FICA over that period. Sweet!

          • The Mad Fientist
            November 11, 2013 at 9:38 pm

            I’m glad you got everything worked out! Hopefully it wasn’t too painful dealing with the HR department.

        • Andrew
          December 7, 2013 at 9:27 am

          Late reply, but you most definitely can house your HSA wherever you want it, even if your company partners with an HSA bank. Your payroll deducations will have to go directly to that bank, but there is nothing stopping your from transfering over cash to another HSA provider.

          • The Mad Fientist
            December 7, 2013 at 12:56 pm

            Oh nice! I assumed you’d be stuck with whatever HSA bank your company partners with. Since I’m happy with my employer’s HSA bank, I never looked into the possibility of redirecting my payroll deduction somewhere else.

  6. November 7, 2013 at 4:35 pm

    Love the graphic, MF.

    You might also make the point, as I believe you have before, that HSAs are very different than FSAs (Flexible Spending Accounts).

    • The Mad Fientist
      November 7, 2013 at 8:12 pm

      Thanks, Jim!

      I’m glad you brought up FSAs. Yes, they are definitely very different than HSAs and the strategy I described in this post will not work with FSAs.

  7. Nick
    November 7, 2013 at 5:15 pm

    Mad Fientist, another awesome post! Thanks for sharing. There are a few other ways to reduce your FICA taxes, but definitely not many (i.e. medical, dental, and vision premiums, group term life insurance premiums (up to $50,000 in coverage), FSA contributions, and dependent care account contributions).

    @Jeremy – withdrawals from a HSA after 65 not used for qualified medical expenses are not subject to the 20% penalty, but would be subject to ordinary income taxes. So, this would be similar to a Traditional IRA. Still, I like the flexibility and some might be able to convert all of the traditional accounts over to the roth accounts by age 65 and pull the money out of the HSA without taxation (assuming they stay below the deduction and exemption level in that year).

    @13owie – keep in mind that you have until April 15, 2014 to make 2013 contributions to your HSA. Given you are changing coverage on 12/1, you probably will not be able to contribute much through your paycheck but might check with HR. However, you can take advantage of the “last-month rule” and still contribute the HSA maximum for 2013. You just need to remain covered in a high deductible health plan in all of 2014 (i.e. the “testing period”) to qualify. There are several places to go to contribute to a HSA. If your employer suggests a provider, it usually makes sense to go with them as this is usually the only way to contribute through your paycheck (and save FICA taxes). There are also several other options (i.e. HSA Bank, Optum Bank, etc.).

    • The Mad Fientist
      November 8, 2013 at 7:40 am

      Hey Nick, thanks for providing a few other ways to lower your FICA taxes. Sadly, it doesn’t look like any of those other options are as exciting as HSA contributions but at least we have one good way to lower our FICA taxes while saving for the future.

      • Nick
        November 8, 2013 at 7:48 pm

        I agree! The HSA is awesome. Thanks again for all of your posts. This blog is great!

        • The Mad Fientist
          November 10, 2013 at 6:22 pm

          Glad you’re still enjoying it. Thank you again for providing extra details in the comments!

  8. Justin Katz
    November 7, 2013 at 9:14 pm

    At my current employer I am offered a NON-HDHP (not eligible to open an HSA). I can opt out of the health care and receive $115 per week on top of my paycheck.

    Do you know of any HDHP plans for a 25 year old healthy male in Pennsylvania.? Can I even do this legally if I am offered health insurance?

    • Vijay
      November 7, 2013 at 10:07 pm

      I’m not an expert, but I am a lawyer, so my formal advice is to consult someone else. That being said, I’m pretty sure you would be better off with an HSA eligible HDHP as a 25 year old healthy male. $115 a week is pretty generous and is very likely to cover the cost of a HDHP policy. Under the ACA these are being phased out but still exist for those under 30. You can go to your state exchange and compare plans. As far as the legality of it, it’s only a question if you are seeking subsidies under the ACA. You would not be eligible for subsidies in the exchange if you have available employer sponsored coverage (I’m guessing you wouldn’t qualify based off of income anyway). The exchanges are still a good place to compare policies though. Given the website issues and your apparent in eligibility for subsidies, I would compare policies on the exchange and if the math works go to the individual insurance company directly to sign up for the plan.

      • Vijay
        November 7, 2013 at 10:11 pm

        And just to be clear, there’ s definitely no legal problem with buying your own insurance, even an HSA eligible plan with the accompanying tax advantages if you turn down employer sponsored coverage. Only issue would be eligibility for subsidies.

      • The Mad Fientist
        November 8, 2013 at 7:42 am

        Thanks a lot for the great response, Vijay!

  9. November 7, 2013 at 9:16 pm

    This year my employer is giving us an HSA as part of our new health insurance plans. I’m really excited to start taking advantage of the tax free contributions I can stash away along side my 401k. The only thing I was bummed about was employer contributions count towards the IRS limit. I originally figured it was similar to a 401k where employer contributions are seperate from your own.

    • The Mad Fientist
      November 8, 2013 at 7:44 am

      Yeah, it is a shame employer contributions count towards the annual limit but look at the bright side, at least your employer is contributing for you!

  10. Robert D
    November 7, 2013 at 11:19 pm

    I am an owner of a small business and we offer our employees a health care plan. I am pretty certain it is not an HDHP. Who would I contact to see if I can open up an HSA for them?

    • The Mad Fientist
      November 8, 2013 at 7:54 am

      Hi Robert, you should probably contact the health care provider you currently work with to see if they have an HDHP option. You’ll need to make sure the health plan you offer is an HDHP before you try to set up an HSA.

  11. kyle
    November 8, 2013 at 11:51 am

    So funny you created this post. As I just received my new, fresh HSA literature in the mail the other day, I thought of this exact same method. If I can access HSA funds at 65 with no penalty, why not just leave the HSA alone until then to grow tax free and continue to pay $20 – $50 co-pays out of personal accounts? If I get into a dire health situation before 65, I can always use the HSA. I like how you are thinking!

    • The Mad Fientist
      November 10, 2013 at 6:10 pm

      Haha, I like how you’re thinking!

  12. November 9, 2013 at 6:52 pm

    You know, this never occurred to me before until you brought it up – “Keep track of all your medical receipts so you know how much you are able to withdraw from your HSA – Rather than use your HSA to pay for medical expenses, instead use your after-tax money so that you can leave your HSA money to grow tax free.” I’m going to start doing this and let the HSA grow! This year was the first year I maxed out my HSA. Thanks for the tips!

    • The Mad Fientist
      November 10, 2013 at 6:36 pm

      My pleasure, J.R! I’m glad you found the article useful.

  13. Charlie
    November 10, 2013 at 4:11 pm

    I don’t think this strategy actually helps you, overall. By all means use the HSA for health expenses, but leaving money in there until 65 while you pay expenses out of regular savings doesn’t actually help. Yes, you avoid taxes on the HSA money, but you deplete your regular savings, which you had to pay full taxes on and could have gotten tax-free (or low tax) dividend money from forever. And having an account that you can’t touch until age 65 seems like the opposite of what you’d want for early retirement.

    • The Mad Fientist
      November 10, 2013 at 8:48 pm

      Charlie, check out the Ultimate Retirement Account article.

      • MooseOutFront
        March 29, 2014 at 9:32 am

        Mad Fientist, I have the same question and I don’t think either article addresses it. If a person is maxing all tax advantaged space including HSA and investing everything else in taxable, then I’m thinking that paying medical bills out of pocket with funds that otherwise would have gotten invested is in effect pre-paying your income and FICA taxes. I need to run the numbers, but this specific scenario is relevant to FI’ers in the accumulation phase. One may come out ahead by spending the HSA money in this case.

        • Lifehacker
          March 29, 2014 at 11:05 pm

          You’re aware that you can reimburse at anytime down the road, correct? So you can pay personally, and then reimburse much later (post market run up or whatever)

        • The Mad Fientist
          March 30, 2014 at 10:19 am

          Say you have $2000 available to invest in your taxable account, $4000 sitting in your HSA, and a $1000 medical bill. You can’t lower your taxes any more by investing that $2000 because you said your retirement accounts are already maxed out so you’re stuck paying FICA and income taxes on that money no matter what you do. So you can either pay that $1000 medical expense out of the $2000 you have to invest in your taxable account or you can pay for that expense out of your HSA.

          If you pay for it out of your taxable account, you’ll have a total of $5000 invested ($1000 in taxable and $4000 in HSA).

          If you instead pay for it out of the HSA, you still have a total of $5000 invested but $2000 will be in taxable and $3000 will be in the HSA.

          Since the totals are equal, it makes sense to keep more money in the tax-sheltered investment so that it can grow unimpeded.

          As Lifehacker said, you can then withdraw that $1000 from your HSA at any time but it makes sense to leave it growing tax free until you absolutely need it.

  14. fiveoh
    November 11, 2013 at 12:30 pm

    If I have an individual HSA account(not thru my employer), is there a way to do payroll deduction?

    • The Mad Fientist
      November 11, 2013 at 9:15 pm

      Sadly, I don’t think you’ll be able to take advantage of pre-tax contributions unless you contribute through your employer.

  15. Srini
    November 11, 2013 at 1:19 pm

    Hi,
    I’m big fan of your hacking posts. This one the best. Could you please let me know which companies offer the HSA with index fund option(most of them I checked have mutual funds).

    Thanks,
    Srini

    • The Mad Fientist
      November 11, 2013 at 9:22 pm

      Thanks, Srini.

      I personally use Fidelity and am able to invest in index-tracking ETFs with them. I know http://www.hsaadministrators.info allow you to invest in Vanguard funds and from what Jeremy said above, it sounds like http://www.hsabank.com/ offers a wide variety of funds/ETFs to invest in as well.

  16. Vicki
    November 19, 2013 at 8:06 pm

    It was my understanding that the HDHP could not have a co-pay per Dr visit.

    • The Mad Fientist
      November 20, 2013 at 8:05 am

      Hey Vicki, there’s nothing I’ve read that states HDHPs can’t have co-pays.

  17. Suneeta Nallakatla
    November 20, 2013 at 9:26 pm

    Hi there,

    I love how brilliantly you’ve explained what has been intuitive to me all along, in a manner that I can now use as ammunition to convince my new husband that this is the right thing to do!!

    I have a question that I’m wondering if you’ve run into. My husband and I both work for the same employer, and we have 4 kids between us. Our employer offers a HDHP that covers only ‘Employee and Dependents’, but excludes the spouse. Separately (obviously) they also offer a HDHP that covers ‘Individuals’.

    If my husband picks up coverage that covers himself and ur daughters (but excludes me, and I then pick up coverage that covers myself only, would he be able to contribute the ‘family’ maximum of $6,550, while I am able to additionally contribute the ‘individual’ maximum of $3,300 for a total of 9,850?

    Thanks so much! Any help would be greatly appreciated!

    Suneeta

    • The Mad Fientist
      November 23, 2013 at 9:47 am

      Hi Suneeta, sorry for the delayed reply; I’ve been traveling the last few days and haven’t had much time to be on the computer.

      I’m glad I was able to provide that very valuable spousal ammunition :)

      Sadly, the limits are per individual/family and not per plan so you both would only be able to contribute up to the $6,550 family max. I like your thinking though!

  18. November 26, 2013 at 10:15 am

    Hey good and timely topic. My employer only offers the HSA if you are getting a high deductible health plan. Currently I am under the Mrs. work plan so I cannot contribute towards an HSA. Do you know if there is a loophole to this specific scenario?

    • The Mad Fientist
      November 26, 2013 at 1:21 pm

      Sadly, I don’t think there are any loopholes. You need to be enrolled in a High Deductible Health Plan to contribute to an HSA.

  19. December 2, 2013 at 2:06 pm

    We max the HSA but still use it to actually pay for the occasional medical expense. I figure the few hundred we pay out won’t have a huge impact, though perhaps this isn’t optimal.

    • The Mad Fientist
      December 2, 2013 at 9:29 pm

      Yeah, it’s the tax you save up front that’s the big deal so I wouldn’t worry about using the HSA for a few hundred dollars worth of medical expenses.

  20. Kingston
    December 4, 2013 at 10:19 pm

    I can’t find anything about HSAs on the Fidelity website. Is it possible new customers can no longer manage their HSAs through Fidelity? Or am I not looking in the right place?

    • The Mad Fientist
      December 4, 2013 at 11:34 pm

      Hi Kingston, here is a link that I found: http://workplace.fidelity.com/health-savings-account.html. It looks like Fidelity only offers HSAs to organizations that have over 500 participants though so sadly it may not be possible to enroll as an individual with them.

  21. Lori
    December 28, 2013 at 9:33 pm

    This was our 1st year on an HSA, and I have $3800 in qualifying expenses that I could take out. I know that I could save these qualifying expenses until future years and let the money stay invested in the HSA, but would it not be better for me to take the $3800 reimbursement and open a Roth IRA with that money?

    • The Mad Fientist
      December 30, 2013 at 1:35 pm

      Hi Lori, I tend to max out my IRA in addition to maxing out my HSA so for me, it makes sense to leave the money in the HSA.

      If you are only going to contribute to an IRA if you use the money from your HSA though, then it may make sense to do that if the fees associated with the IRA are lower or if your IRA offers better investment options.

  22. JC
    February 6, 2014 at 5:47 pm

    One more benefit you get from your HSA once you reach 65 yrs old is that you can make your Medicare Policy payments (and probably MediGap policy payments, I’ll have to check on that) from your HSA account with no penalty OR taxes.

    • The Mad Fientist
      February 7, 2014 at 1:40 pm

      Great point, JC. Thanks for chiming in!

  23. Mike
    February 26, 2014 at 12:00 pm

    Love the article. I have a question though. It is my goal to leave my 9-5 by age 30. I am 23 now. I currently am maxing out my Roth IRA each year. Should I continue doing so or should I take that money and max out my HSA? I can’t afford to max out both. Would appreciate any insight. Thanks

    • The Mad Fientist
      February 28, 2014 at 8:49 am

      That depends on how much you are still able to invest in your IRA each year when investing in the HSA. If you are only able to invest a little bit, you may want to divert some of your HSA funds to your IRA so that you can access that money early, if necessary.

      The only way to access your HSA early is to have a medical expense so if you’ll need that money during the first part of your early retirement, you may not be able to access it since you’ll hopefully be a healthy young guy that doesn’t spend much on healthcare.

  24. February 27, 2014 at 4:07 am

    I agree with you on the HSA, but I would argue for taking it one step further (if you have a second source of non-w2 income) and use an HRA. I wrote an article very similar to yours with this extra piece added on. I would appreciate your critique or downside analysis to what I wrote:

    http://jaredfielding.com/2014/02/26/my-insurance-analysis-health-savings-accounts-health-reimbursement-plan/

    • The Mad Fientist
      March 1, 2014 at 12:01 am

      Looks great, Jared!

      What type of business entity do you have? It seems like the only way I’d be able to take advantage of an HRA as a sole proprietor is if I employed my wife. Do you know of any other loopholes?

      • Lifehacker
        March 1, 2014 at 2:16 am

        I have a C-Corp that I tie with my HRA currently. I’ve been doing that for 10+ years. The HSA + HRA straddle is a new strategy I just thought of this year. I ran it by an investment adviser and a former IRS agent and an insurance agent — all linked me to articles that show it’s an allowed approach.

        As you saw, I’m treating the HSA as an investment account (without income restrictions) that I will use in my later years (60-70).

  25. Kyla
    March 20, 2014 at 4:46 pm

    I’m a little late to this article, but I saw the comment about changing the bank your HSA is at (through your company) to another one so that you can invest your HSA (versus keeping it in a savings account). Can you speak a little more about how this is done?

    Thanks!

    • The Mad Fientist
      March 20, 2014 at 9:02 pm

      Hi Kyla, I actually haven’t done this before so maybe one of the other readers can chime in with some firsthand experience?

      You’d probably be able to call the bank you’re hoping to move your money to and they could help walk you through it.

    • KC
      March 22, 2014 at 7:22 pm

      I just did this in January as my employer’s investment options were meager. You can either “transfer” or “rollover” your employer’s HSA to another HSA. You may have more that one.
      You may transfer as many times as you like but there may be a fee. You can Rollover once per year and there’s no fee.
      I went with HSA Administrators through the HSA bank. It was pretty easy.
      Basically you just send your HSA a form from the new HSA and they make the transfer.
      I found a link that really covers this well at The Financial Buff make sure you read the comments, too,

      • Kyla
        March 23, 2014 at 3:08 pm

        Thanks to everyone who submitted a helpful comment and thanks Madfientist for writing this article!

  26. March 27, 2014 at 9:57 pm

    My employer only offers a FSA (flexible spending account). My wife and I never contributed because I believe you have to use up all the funds in the same year. Now that we are expecting our first child, we may fund it. Are there any hacks for a FSA? Since our employer doesn’t offer a HSA, are we out of luck?

    • The Mad Fientist
      March 28, 2014 at 10:36 am

      Correct, Nick. You do have to use up all of your FSA funds within the year, otherwise you’ll lose them, so sadly there aren’t any good FSA hacks.

  27. WTB
    April 1, 2014 at 7:15 am

    Hi there – I have been using this strategy since my employer first offered the H.S.A. back in 2009. Slowly got better at it as I began to learn how the H.S.A. operates. I wish you had this blog post back then. Biggest mistake I made along the way was paying for my Lasik out of H.S.A. funds. I could be earning tax free on those expenditures right now!

    Anyway, you mentioned you were engaged or recently married in your other post. I will be getting married in July so will being upgrading to the family contribution – woot!. My question is (which stumped by H.S.A. administrator by the way) since I will technically be married (for tax purposes) all of CY14, if my future wife has QME prior to July in CY14, can I claim those expenditures?

    My H.S.A. administrator answer, “This could potentially put you in a gray area with the IRS, you should contact a tax professional”. I haven’t done much reading up on this yet, my thoughts since I am not talking huge dollars here, disburse only these expenditures this year and fight them at audit if necessary. That way the issue is isolated to one tax year. Any thoughts?

    • The Mad Fientist
      April 1, 2014 at 4:13 pm

      Hey WTB, my wife and I still maintain separate HSAs so I’m not sure. You may want to call the IRS helpline to see what they have to say. Good luck and please let us know what you find out!

  28. Jenny
    June 13, 2014 at 9:17 pm

    My HSA takes out $3 a month in fees. Can you recommend a fee-free HSA that also let’s you invest in whatever investments you want?

    • The Mad Fientist
      June 20, 2014 at 12:49 pm

      I imagine most HSA custodians charge a fee. Sometimes your employer will pay the fee for you (which is what mine does) but you’ll likely have to pay it once you quit your job.

  29. Kyle
    June 18, 2014 at 10:02 am

    Hey, quick question for you. I love your articles by the way and I would like to start an HSA as soon as possible. I have always been given insurance by my employer and they don’t offer a HDHP. My question is what is the best way to get a HDHP and start a HSA? Also, what investment companies allow you to have an HSA so I can look into what investments I could have? I live in Maryland. Thanks so much!

    • The Mad Fientist
      June 20, 2014 at 12:55 pm

      If your employer gives you a health plan, it may not make sense for you to look elsewhere for an HDHP. You may want to chat with your HR department to see if they could provide an HDHP option instead.

      I don’t know what is available in Maryland specifically but some of the other commenters gave a few good options so you may want to look into those (see above).

  30. Kelly
    August 3, 2014 at 1:32 pm

    Thank you so much for this post, it is extremely helpful! In fact, the strategies discussed in all your articles, supplemented by readers’ comments are getting me to look at all sorts of ways to achieve FI (faster) that I’d not previously considered. OK, on to my question …

    I’ve maxed out my Health Savings Account for several years now and the balance is growing! My employer has also offered HSA-compatible Flexible Spending Accounts – which I have used in conjunction with my HSA. This is a limited version of the FSA, which only allows dental, vision and preventative & prescription copays for reimbursement. Now that I know I can accumulate my medical receipts and apply them for withdrawals in later years, I’m ready to get my documentation in order. My question is, do the expenses I paid for using HSA-compatible FSA funds qualify for HSA withdrawals?

    • The Mad Fientist
      August 10, 2014 at 9:30 pm

      Glad you enjoyed it!

      I’m not very familiar with FSAs but I can’t imagine the IRS would allow you to do what you proposed since FSA contributions are also pretax.

  31. Jason
    September 24, 2014 at 7:55 pm

    Great article Madfientist. I just switched employers so this is a great article for me. My new employer offers an HRA through Aetna (http://www.aetna.com/individuals-families/member-healthcare-cost-management/health-reimbursement-arrangement.html) though I’m confused about this line in the link above – “If you don’t use the entire fund during the year, it’s not a problem. The balance usually rolls over to next year’s fund. (But if you change employers or health plans, you can’t take it with you.)”. Does that mean that if I leave my employer or switch health plans, I can’t take the HRA with me but will it sit with my employer? Would I still have access as an ex-employee?

    • The Mad Fientist
      September 25, 2014 at 10:41 am

      Hi Jason, an HRA (what you have) is very different from an HSA (what this article is about). Your employer owns your HRA so you won’t be able to access it as an ex-employee whereas an HSA is owned by the employee and can be accessed after leaving.

      • Jason
        September 25, 2014 at 11:47 am

        Wow, thanks Madfientist, sorry about that.. I somehow skipped over that one key letter.

        • The Mad Fientist
          September 25, 2014 at 11:49 am

          No problem! Some people have skipped over the first letter and got confused between FSAs and HSAs, which is even worse since you lose the money in an FSA at the end of the year!

  32. dave
    November 19, 2014 at 3:43 pm

    We have an HSA from last year. My wife has since changed jobs (insurance through her) and we are now in a PPO. Can we still make contributions to the HSA even though we are no longer in a HDHP?

    • The Mad Fientist
      November 30, 2014 at 6:31 am

      No, you need to be enrolled in an HDHP to make contributions to an HSA.

  33. frugalnoggin
    December 19, 2014 at 10:39 am

    Is it possible to move HSA funds from one firm to another, and if so how difficult is it? So for example, if my employer doesn’t offer an HSA with a low-cost index fund, can I just move the funds over to a different fund I’ve set up independently?

    • The Mad Fientist
      April 3, 2015 at 9:14 am

      Yes, it is possible but I don’t know how difficult it is because I’ve never done it. Maybe someone who has can chime in?

  34. Daniel H
    December 19, 2014 at 3:48 pm

    I could swear I just left a comment here, but it’s not showing up, so I’m posting again (with a few edits I apparently forgot to make). Are the comments moderated or something?

    If it’s just some system being slow, sorry for the double post.

    ————————————————-

    HSAs do seem like a good deal, I’m confused about a few things you say about HSAs. The first is, in The Ultimate Retirement Account, you said, “So to describe [depositing $3k in an HSA and paying for a $200 QME from a taxable account] in another way, the HSA at the end of the first year is like a Traditional IRA with a balance of $2,800 and a Roth IRA with a balance of $200.”. This doesn’t seem to be correct, because in a Roth you can withdraw the gains from that money tax-free also. Secondly, it seems to me like it would actually be better to withdraw money from HSAs for QMEs as soon as possible, for a similar reason. Let’s set up three overly-simplified scenarios as I understand HSAs to work, so I can illustrate my confusions. (I think they’re simple enough that it’s not worth getting the Lab Rat involved):

    In 2014, I think I can contribute $3,300 to an HSA (I’m not sure if I have the figure correct because I don’t personally qualify at the moment; I care because I expect to qualify in the future). Let’s say I do that, and invest it all in VTI. I also have $300 in a separate account, again entirely in VTI. I incur $300 of qualified medical expenses in 2014. After 2014, I don’t touch either of these accounts. Counting dividends, VTI exactly doubles in the next 10 years (slightly more than a 7% return).

    In the first scenario, I pay for the entire expense from the HSA. I now have a $3,000 HSA (none of which I can withdraw tax-free) and a $300 taxable account. In 2024, I have a $6,000 HSA which I can withdraw from as regular income when I turn 65, and a $600 taxable account with $300 of capital gains.

    In the second scenario, I pay for the entire expense from my taxable account. I now have a $3,300 HSA with $300 of money I can withdraw tax-free. In 2024, I have a $6,600 HSA; I can withdraw $300 of this tax-free and $3,300 taxed as regular income when I turn 65. Compared to the first scenario, I have $300 which are now taxed as income instead of capital gains and dividends—almost certainly a bad tax move, given that capital gains are often taxed at 0% once you reach FI.

    In the third scenario, I pay for the entire expense from my taxable account, but I pretend I moved $300 from my HSA to a Roth IRA as you said is equivalent in the first article. I now pretend I have a $3,000 HSA (none of which I can withdraw tax-free) and a $300 Roth IRA. In 2024, I have a $6,000 HSA which I can withdraw from as regular income when I turn 65, and a $600 Roth IRA which I can withdraw from tax-free. Compared to the first scenario, I have $300 of money which I pay no taxes on instead of capital gains and dividend taxes; unfortunately, the IRS wants to know why I’m not paying income taxes on it as per the second scenario.

    As you can see, to me it makes the most sense to use the HSA immediately (unless you’re trying to shield assets from the FAFSA or something). As far as I can tell, making the situation less oversimplified actually makes that option stronger: you can do tax loss harvesting and tax gains harvesting, for example.

    • The Mad Fientist
      April 3, 2015 at 10:09 am

      Hi Daniel, initial comments are moderated but all subsequent comments should post immediately.

      You’re right that it’s not exactly like a Roth because you wouldn’t be able to withdraw the gains on that money tax free so I removed that section from the Ultimate Retirement Account post. When I wrote that, I was just describing the status of the accounts at that point in time but the way it was written implies that the growth would be treated in the same way as a Roth, which is incorrect, as you pointed out.

      As far as your other remarks are concerned, there are a few things to consider…

      First, your dividends will be taxed along the way in the taxable account so you won’t have the same amount you would have had if those funds were invested in the HSA.

      Second, not to sound too grim but it is likely that most of your HSA money will end up going towards medical expenses eventually so it won’t be taxed at all (HSA contribution limits are low so it’s not like a huge portion of your portfolio will be tied up in an HSA). Therefore, it makes sense to let that money grow tax free so that there’s more of it there to use.

      You raised some good points and I completely agree that for some people, it may be better to just use the HSA funds for medical expenses along the way (especially if you can’t be bothered to keep track of the receipts). The way I personally look at these things though is, I’d rather take advantage of all opportunities I can now and then figure out ways to lower my taxes later if I need to, rather than give up tax advantages now that I’ll never be able to get back in an effort to affect an unknown future.

      In any case, the most beneficial aspect of the HSA is the initial tax deduction and FICA tax avoidance so no matter what you decide to do with the medical expenses afterwards, you’re still a winner!

  35. Joel
    December 23, 2014 at 1:29 am

    I’m getting married next year. Currently, we both have HDHP insurance with HSAs. We both have setup our payroll contributions to maximize our HSAs for $3,350 for the year. When we get married, we will be switching over to a family HSA plan which is limited to $6,650 per year (instead of $6,700). Therefore, I need to calculate exactly how much I can actually contribute to the HSAs during the year.

    According to IRS Publication 969,
    “You may withdraw some or all of the excess contributions and not pay the excise tax on the amount withdrawn if you meet the following conditions.
    1. You withdraw the excess contributions by the due date, including extensions, of your tax return for the year the contributions were made.
    2. You withdraw any income earned on the withdrawn contributions and include the earnings in “Other income” on your tax return for the year you withdraw the contributions and earnings.”

    Does reporting these amounts as other income result in the 7.65% SS and Medicare taxes being added onto what I owe for the year?

    I think it makes sense to err on the side of contributing too much. But I want to make sure that I can pull the money back out once I can calculate exactly how much was excess. Next, I want to determine what additional tax penalties I may have to pay and if I have to then pay the 7.65% SS and Medicare taxes with my tax return. In theory, I would expect that I would have to, but this could be one of those silly loopholes. If it avoids the 7.65% SS and Medicare taxes, in this one year only, does it make sense to overcontribute to the HSA and shelter $3,400 from the 7.65% taxes?

    • The Mad Fientist
      April 3, 2015 at 10:15 am

      I personally wouldn’t over contribute because I wouldn’t want to add complexity to my already complicated tax situation so I’d definitely err on the side on caution to save myself the headache.

  36. RN
    January 9, 2015 at 11:26 pm

    Thank you for another great post! I am maxing out my HSA this year along with Employer contribution. Any tips of how to track expenses and save receipts?

    Thanks,
    RN

    • The Mad Fientist
      April 3, 2015 at 10:19 am

      Hey RN, Dave M suggested a great way of doing it over on the Ultimate Retirement Account post. Here’s his method:

      “I created a paper file to keep all the paper receipts in chronological order, but I fully expect them to be faded and unreadable in a few years. So, before putting them in the file, I scan them to PDF and save each receipt with a format like “YYYY-MM-DD HSA Receipt for Blah Blah Blah.pdf”. These all get put in a folder on my computer and backed up to multiple locations. The files sort perfectly in the order in which you will likely reimburse yourself from your HSA account in the future. As you withdraw the funds from your HSA, move the corresponding receipts into a separate subfolder to indicate they have been reimbursed.”

      That’s what I plan to do once I get around to scanning all of my receipts!

  37. JB
    January 14, 2015 at 6:30 pm

    Hello,
    I’m just trying to confirm if I get a new HDHP for 2015 if I would be able to contribute to the 2014 HSA cap before April 2015? I am a contractor for now and it would be nice if I were able to contribute for both 2014 and 2015 if that is an option.

    • KC
      January 15, 2015 at 8:24 am

      Unfortunately not. You must be enrolled in the HDHP on the 1st of the month to make a contribution to your HSA for that month. As an example when I started mine, I was enrolled in our HDHP in the Middle of January, so my contributions were figured from February on. The result was that my maximum contribution was 11/12ths of the maximum $6650 ($6095) for my family HSA that year.

      See IRS form 8889 for more info

  38. Andrew Wright
    April 15, 2015 at 12:34 pm

    Great post! I’m trying desperately to figure out one wrinkle that you’ve not touched on. Would love any thoughts

    For reasons I will not elaborate on (boring, not secret), I established and funded an HSA in prior years, but did not participate in a HDHP this plan, and may not for the next few years.

    I have money in my HSA, and have some medical expenses from last year and this year that I’ve not yet reimbursed myself for.

    All of the IRS info here (http://www.irs.gov/uac/About-Publication-969) and otherwise is consistent in stating that you can only use the HSA to pay for (or reimburse for) expenses incurred after the account was opened.

    It’s clear that in years where you’re not participating in an HDHP, you may not fund the HSA, but you MAY use funds from it for medical expenses.

    So my question is…

    As long as I leave something in my HSA to keep it active, can I keep receipts for all the expenses I incur for years where I’m not participating in the HDHP and later fund the HSA enough to reimburse myself? In other words – even though I didn’t have the saved money to reimburse all of those expenses at the time, I can preserve the option to reimburse at a later time.

    Hypothetical Scenario:

    2014 – I fund HSA $5k and have $3k medical bills that I save receipts for but don’t reimburse
    2015 – No longer in HDHP, and have $2k medical bills that I save receipts for but don’t reimburse
    2016 – Not in HDHP, and have $3k medical bills that I save receipts for but don’t reimburse
    2017 – Participate in HDHP, contribute $5k (account now at $10k total), and reimburse myself $8k.

    If it’s not obvious, the major benefit here would be completing avoiding FSAs and the stress of funds that don’t rollover, while not losing the ability to pay for medical expenses from a tax-free source eventually.

    Would love your thoughts, and any tips on where I might find an answer!

    • The Mad Fientist
      April 17, 2015 at 11:59 am

      Hmm, that’s an interesting idea and it seems like what you described should be possible but I don’t know if I’d keep an HSA open for years and years without actually contributing to it. HSA banks usually charge an annual fee to keep an account open so if you only have a little bit of money in the account and aren’t benefiting from annual tax-free contributions, it may be best to just use those funds up when you have the medical expenses.

  39. Matthew
    July 28, 2015 at 3:54 pm

    Just discovered your website and am excited to read more articles…keep up the good work. As for the HSA – I recently changed employers and no longer have a HDHP. I had previously been maxing out the account every year and investing in vanguard funds. A few quick questions….

    1. I know you aren’t supposed to contribute without a HDHP but how would they know? And what is the punishment?
    2. Would there be any way to fund and invest in the account throughout the year and liquidate the excess before tax time?
    3. If no to the previous two, what do I do with it? Should I just leave the current balance sitting there invested and use as needed for medical expenses in the future? I’m 26 so dont anticipate much medical expenses – i care more about the hsa as an investment vehicle than an account to pay bills.

    Thanks!

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