Use HSA’s for Maximum Impact

An HSA ((Health Savings Account) is one of the few tax benefits that did not change with TCJA 2017. Tax-wise, they are superior to 401k’s, IRAs, and Roth IRAs because you get a deduction on the front-end and you don’t pay tax on any of the balance, as long as you use your distributions to pay qualified medical expenses.

Congress first gave us the ability to contribute to HSA’s in 2004, when we were fighting a war on two fronts and Medicare was our only form of (semi) government-mandated health insurance. In the post-Obamacare era, insurance rates have skyrocketed and consumers are penalized if they don’t have insurance coverage. Many people are unaware that their employer offers this valuable benefit – we have seen a big uptick in them in the last five years. If you don’t yet have an HSA, here’s what you should know.

An HSA is a health care nest egg. You contribute to one as you would to an IRA. Unlike your IRA, however, your contributions are deductible no matter how much or how little you earn. While you cannot use your HSA to pay for health insurance (with a few exceptions), you can pay for all other qualified medical costs, such as long-term care insurance, dental work, and hearing aids. Suffice it to say that, other than health insurance premiums, if the IRS allows your medical expense as a tax deduction, you can use your HSA to pay for it.

An HSA is the only kind of savings account that is truly triple-tax free. In addition to an up-front deduction, both the growth (interest, dividends, and capital gains) and your withdrawals are tax-free, as long as you use them for qualified medical costs. There is no limit on how long you can leave your money to grow (i.e. no “use it or lose it” rule) and you can contribute to your HSA until you qualify for Medicare.

You must be covered by a qualified High Deductible Health Plan (“HDHP”) to contribute to an HSA (see HDHP Limits). An HDHP has low premiums and, theoretically, you should use the money you save on health insurance to fund your HSA. The intent of the law is to make you a cost-conscious consumer since you’ll be spending your own money on medical care. In other words, you may think twice about getting those braces for a slightly crooked smile or be a little more careful when buying name-brand versus generic prescriptions.

HSAs are no-brainers in particular for high-income professionals and business owners, referred to as HNW (High Net Worth). For 2022, individuals can contribute $3,650/yr and families can contribute $7,300/yr. You can contribute an extra $1,000/yr. for family coverage if you are age 55+.

HSAs allow high-income professionals, such as a physician couple, to save over thousands of dollars over their careers by maxing out an HSA, and that doesn’t count state and local taxes, either. That’s the same as having the IRS pay in about 40% of your HSA contribution. Even better, your HSA contribution is an “above the line” deduction, meaning you get to deduct it on page 1 of your 1040. This reduces your AGI (Adjusted Gross Income) and helps you qualify for other tax breaks!

You can treat your HSA like an extra IRA by investing your contributions rather than emptying out your account to pay for annual healthcare costs. Just save all of those receipts to take distributions from your HSA at a later date – it doesn’t matter if you wait 40 years to take money out of your HSA as long as you have proof of unreimbursed qualified medical expenses during the time you participated in an HSA.

You’ve probably heard the estimates that retirees can expect hundreds of thousands of dollars in healthcare expenses in retirement. What better way than to invest in a “healthcare IRA” for future medical bills? But the good news is that even if you have no healthcare expenses after you retire, you can take distributions to reimburse those medical bills you paid during your working years and the money you take out is all tax free!

For business owners, HSA’s can be offered through work as an employee benefit, which is a win-win for both the employer and the employee. Often, the employer funds part of the annual limit and the employee tops off the account. A little-known tip is that by withholding HSA contributions through your employer, you save not only income taxes but also FICA taxes.

15 years ago, before HSA’s went mainstream, both employees and employers were more resistant to blowing up the traditional health insurance to try something new. Now that consumers are more familiar with their advantages, employees are quite receptive to participating in an employer-financed account in exchange for a higher deductible plan.

Whether you are an individual funding your own plan or participating in an employer plan, you can contribute to your HSA until the due date for filing your tax return, not including extensions.

If you change jobs and your new job offers an HSA and you didn’t have one before, you can contribute for a full year at the end of that year. The catch is that you must continue to qualify for and have access to an HSA through at least December 1 of the following year or you will be subject to the “Last Month Rule” and pay taxes and penalties.

Last tip: your HSA belongs 100% to you beginning with the 1st contribution. That means it is totally portable. If you want to use a different custodian with better fees and investment choices than your employer account, simply roll over your HSA balance from your employer custodian to the firm of your choice periodically. Currently, our recommended HSA custodians are Fidelity and Lively for low fees and zero cash maintenance requirements.

11 thoughts on “Use HSA’s for Maximum Impact

  1. I heard that when you have an HSA, healthcare providers can now charge you more per line item or medical test than you would have been charged had you not had an HSA. If this is true, for those of us who are rarely sick, even though we are paying HUGE deductibles and also high premiums, we would now be setting ourselves up to pay more than the “rack” rate as well. I would think this would be illegal, because it seems like it is defeating the purpose of what is trying to be accomplished with the HSA, but who knows. I’m trying to decide what to do for my husband and me, so any help you can provide would be appreciated! 🙂


    1. I have not heard of this but I think it would be easy to get away with because medical billing and collections is such a complicated process. The best thing to do might be to talk to the billing department at your medical provider(s). Typically, I find that those I speak to do not have a “dog in the fight” and will tell me what is going on and what I need to know.


  2. I read that HSAs can be used to pay premiums; is that correct?

    I’m just starting to think deeply about personal finance: would you recommend starting retirement accounts (IRAs) at Vanguard with low-costs across all funds and an HSA at Fidelity, or all accounts at Fidelity even though some have higher ERs and some are zero fees/loss leaders?


  3. Hi, Rebecca – No, HSAs cannot be used to pay premiums. And my recommendation is to use the tax-free growth in your HSA as an extra retirement account rather than raid it to pay personal expenses during your employed years.
    If you may have a solo-401k at any time in the future, I would refer you to E*TRADE over Fidelity and Vanguard, as it is the most flexible platform. I prefer to focus on long-term growth in your accounts and am agnostic about custodians, otherwise, Choose the one with the platform you like best and and simplify to use as few custodians as possible. Contrary to popular belief, I don’t emphasize lowest-cost funds over a good, solid portfolio, rebalanced annually and built based on the needs of your financial plan.


  4. Thanks for replying to Rebecca. We’ve discussed this as well when we happen to be in the dining room together actually.

    Anyhow, following up on that: we’re wondering if contributing to an HSA would qualify us for the Saver’s Credit. If not, any other resident deductions/credits that we may be missing?

    And lastly, what’s the general cost to have a graduating resident/new attending’s financial plan looked over? And do we have to be in Kentucky?


    1. Hi, Sara, No, HSA contributions do not afford you a Saver’s Tax Credit, sorry! However. Roth and Traditional IRA contributions will. You can learn more about our services and costs at We have very few clients in KY! All services are virtual and clients are all over the US. One has been stuck in Columbia due to COVID and we’ve still managed to get the taxes finalized – Zoom is awesome!


  5. One last question: would you recommend funding an HSA first or an IRA first?
    My thoughts are to maximize HSA and traditional IRA as an intern for the Savers Credit. Is this okay? Not sure what to do during my other years in training…mix of Roth and traditional, but do HSA first, or do HSA afterwards?


  6. I almost always recommend HSA first. The reason is that your IRA + growth will be 100% taxable at your top marginal bracket someday. I think that crushes the small Saver’s Credit you’ll get with the TIRA. Of course, I am presuming well-diversified portfolio in both TIRA and HSA, grown for retirement spending.


  7. Question about HSA…I’m doing it through payroll taxes but they say there’s a $2000 threshold I have to contribute in cash, before any of it is invested. Should I rollover this to another place (any recommendations?) and is there an optimal time to do each yearly and a estimate of how much it should/shouldn’t cost? Can my employer find out and retaliate?

    Another question from my partner who is also a resident…currently wondering whether or not to contribute to a 403b with a $25 annual maintenance fee after maximizing out IRA, or just go taxable or somewhere else maybe? I ddunno


    1. Hi, Jim,

      1. Yes, I’d recommend moving your HSA to another provider. Your employer should be oblivious – why would they care? For efficiency, the initial contributions will be directed to the employer account. It is up to you to r/o to a new account (recommend Fido or Lively). I believe that neither of them have a minimum.
      2. Let’s see – your partner is considering bypassing the ability to contribute to a 403b for less than the cost of an Uber ride to your favorite bar? Does that sound reasonable? The bigger issues are:
      a) He doesn’t want to miss out on any matches (rare for residents, but just in case) and
      b) If the 403b has a Roth option, this is an ideal time to contribute as much to a Roth as possible.

      Good luck!


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