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Citizen Mint


HSA Plan Investing: A Hidden Retirement Planning Gem

Health Savings Accounts (HSAs) were introduced in 2003 as tax-exempt trust or custodial accounts to pay or reimburse many medical expenses as they occur.


Unlike a flexible spending account (FSA), the funds in an HSA roll over to the following years when not spent. These are likely the best and least known place to stash away capital for retirement and get rewarded with tax deductions both in the contributions and then the tax free withdrawals at retirement. 

As noted above there are incredible benefits to utilize HSAs. 

  • Triple Tax Preference:
    • Contributions reduce taxable income as well as social security and Medicare taxes.
    • Earnings accumulate tax free
    • Distributions are not subject to taxation when used for medical expenses (some restrictions apply)
  • HSAs stay with the person even when they change employers and/or leave the workforce 
  • HSAs funds can be used at retirement

While we are hopeful that inflationary pressures are easing as demand wanes, supply chains are restored, and employees become easier to hire, it may be time to evaluate your portfolio to make sure it is properly protected if inflation lasts longer than expected.

Below we have aggregated a list of investment opportunities that both provide diversification to traditional stock and bond portfolios while also possibly protecting investors capital during inflationary periods

*Must have a qualifying high-deductible health plan to make contributions. Funds in the HSA may be withdrawn tax free for qualified medical expenses unless a credit or deduction for medical expenses is claimed. After age 65 funds also may be withdrawn at ordinary income tax rates without penalty for any reason. Some health insurance premiums may be qualified expenses such as COBRA coverage, coverage while receiving state or Federal unemployment compensation, Medicare Part B and D premiums and qualified long-term care insurance premiums up to certain limits, but excludes Medigap / Medicare supplement policies and most long-term care policies that include annuity income or life insurance. See IRS Publications 969 and 502. This is not intended to be individual tax advice; consult your tax advisor. 

The above example is for illustrative purposes only and not indicative of any investment. Does not include account fees. Present value of illustrated HSA after 15 years is $146,885. Estimated savings from tax deductions at a 37% marginal rate are $45,430. Assumes cash or income used for health care expenses is not withdrawn from an account with a tax liability. The example assumes the HSA is fully invested; if $2,000 was held in a cash account, the illustrated cumulative HSA account value would be $197,687 is projected to be enough to fund about 13 years of projected average qualified Medicare-related health care expenses for a couple.

Qualifying for an HSA:

  • Have to utilize a high deductible plan (HDHP)
    • Monthly premiums will be lower, but of pocket costs are much higher until you meet the deductibles. Many employers make it cheaper to have a HDHP than a PPO by contributing to the HSA an amount based on if the employee has to meet a self-only or family deductible. 
    • Many hold-outs that like the mental security of the PPO plan worry about the costs if they have a medical emergency. In most case, healthy individuals and families really do spend significantly less than the deductible in most years and as noted above, employers understand the additional cost of emergencies under HDHP and try to make up for this with additional contributions that actually make it a better deal than the PPO. 
  • Have to have no other health coverage 
    • Cannot have additional health coverage that is not HDHP. 
    • You are still eligible if your spouse has a non-HDHP but you are not covered under it. 
  • Not enrolled in Medicare (still can utilize contributed funds from HSA)
  • Not claimed as a dependent on anyone’s tax return 


2023 Contribution Limits 

  • Maximum annual contribution is $3,850 for an individual and $7,750 for a family 
  • Additional contributions of $1,000 are allowed if you are 55 or older and not enrolled in Medicare 


Flexible Spending Account (FSA) 

  • You can’t contribute to an FSA if utilizing a HSA 
  • Still can contributed to a limited purpose FSA such as a one utilized for dependent care or vision/dental care
  • Cannot “double-dip” by trying to get reimbursed by both HSA and FSA to cover same qualified expense 


Distributions from an HSA 

  • Medical expenses are paid up to the deductible of the HDHP. 
  • You may utilize the HSA to pay for medical expenses or pay these out of pocket 

Most medical and dental expenses are qualified under an HSA plan. Additionally, prescription medication and over-the-counter medications for which you have a prescription are also covered. Under the CARES act, certain medications such as pain relievers and allergy medications are covered. 

Qualified expenses could be incurred by you, your spouse, and all dependents you claim on your tax return.

 Other Items to Consider 

If any portion of a distribution is used for non-qualified medical expenses, that portion is subject to income tax PLUS 20% Penalty!! There is no penalty if the distribution was taken after reaching age 65 or after becoming disabled. 

If the HSA holder dies: 

  • HSA will transfer to spouse if they are beneficiary 
  • If there isn’t a designated beneficiary, the accounts stops being an HSA and the fair market value becomes taxable to the beneficiary in the year of death. 
  • If the HSA goes to the estate, the value is reported as income on the final income tax return 


Additional insurance for the following items is okay even with an HSA: 

  •  Liabilities incurred under workers compensation laws, torts, or ownership or use of property Specific disease or illness 
  • Fixed amount cost for hospitalization 
  •  Vision, dental, accident, disability, and long-term care insurance wouldn’t disqualify an individual 

Maximizing Your HSA 

  • Try to pay for medical costs outside of your HSA and use your HSA as another retirement vehicle. 
  • Make sure to invest your HSA. It is best to try and get broad diversification like the rest of your portfolio. Begin as soon as you can to take advantage of compounding. 
  • If the goal is to minimize taxes and maximize savings, max out your HSA contributions before 401k contributions. This will obviously need to be weighed versus loss of 401k contribution match from your employer, but in many times HSA still makes sense. 

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