How to Use HSAs for Tax-Advantaged Savings, Investments

HSAs don’t have required minimum distributions like 401k or IRA plans. They have become more prevalent in recent years due to their tax advantages. Also, unlike flexible savings accounts, HSA balances generally roll over each year without a use-it-or-lose-it provision. 

Assets in HSAs grew to over $116 billion held across 36 million accounts in 2023. This represents a 500% increase since 2013, according to the Consumer Financial Protection Bureau. This growth occurred as more consumers enrolled in high deductible health plans (a requirement to open an HSA), a May report by CFPB showed.

“If you have an employer who provides a qualified high deductible health plan, then you can also contribute to an HSA,” Chloé A. Moore, founder and principal of Atlanta-based Financial Staples, said in an interview. 

“Typically, your employer would provide an HSA account for you, or set it up for you. During open enrollment, there’s typically an option to open an HSA. Some companies are providing a match, or some level of contribution, as an incentive to set up an HSA plan,” Moore added. 

One of the biggest draws for opening an HSA is the “triple tax advantage,” she noted.

“Any contributions you make to an HSA are pre-taxed. This reduces your taxable income. The fund also grows tax free, and any withdrawals you make for qualified health expenses are tax free,” Moore explained.

“Similar to a 401k, if you change employers that account comes with you. You still have access to that money. You can keep the account with whatever bank or institution you had it with, or you could combine it with a new employer’s plan and just roll it over,” Moore said. 

She has seen more people using HSAs. Often, she discusses whether these savings accounts would be worthwhile for clients when reviewing their benefits during open enrollment periods.

“We do the math and see how an HSA could make a difference. That helps people to know that it’s not scary,” she explained. She noted that some individuals worry about the impact of high deductible health plans on their finances.  

“If you are a high earner and you have excess cash flow, you can always just let that money accumulate in the HSA to invest it. You typically have to keep around $2,000 minimum in cash in the HSA,” she noted. 

“If you have the cash flow to max it out every year, in 10 or 20 years you could have a good nest egg to use for retirement expenses or just later on in life,” Moore said.

The IRS has HSA contribution limits. The limits for this year are $4,150 for individuals and $8,300 for family coverage under a high deductible health plan. 

The IRS defines a high deductible health plan as “a health plan with an annual deductible that is not less than $1,600 for self-only coverage or $3,200 for family coverage, and for which the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $8,050 for self-only coverage or $16,100 for family coverage.” 

Aaron Clarke, a wealth advisor at Gainesville, Virginia-based Heritage Financial, noted that self-employed workers and freelancers, who don’t have access to employer-sponsored HSAs, can also benefit from these savings accounts.

That’s because high deductible health plans offered on federal or state health insurance marketplaces would also be eligible for HSAs, he explained. 

“It applies the same for them as every other taxpayer,” Clarke said. Individuals shopping for insurance on marketplaces should make note that not every high deductible plan is labeled as such – so they may have more options than they initially think to access HSAs. 

“A high deductible health plan you pick can qualify (for an HSA) even if it isn’t labeled as such. All you need to do is know what the current IRS limit is for the high deductible plan…and the out of pocket maximum,” Clarke said. 

“Once you’re on that healthcare plan, you can go to an independent HSA provider and open an account.”

Investing through an HSA is typically most beneficial for people “with a really strong cash flow who are maxing out their 401k contribution,” or Roth IRA, and still have money they want to save or put to work, Clarke explained. 

“This is one of the best tax-advantaged accounts that is out there,” Clarke said. “The reason we like (HSAs) so much is the way that you’re able to access the funds is so fluid. And you do not need to use (the balance) for expenses you incurred that same year.” Account holders could save for years to use funds for health care expenses related to pregnancy or childbirth, he explained.

HSAs can grow over the years to serve as a “tax-free income stream,” he added.

“The benefits come long term from being able to keep your income at a controllable level of taxation. You could also use it for medical or dental expenses in retirement,” Clarke said.

Cady North is the founder and CEO of North Financial Advisors. She shared that HSAs could also be a great way to set money aside for out-of-network healthcare costs. 

“If you do any kind of consistent working out, you may need to do acupuncture or other bodywork treatments that may not be covered by a health plan and considered out-of-network,” North explained. “That HSA can help with that.”

“Therapy is another good example. Most therapists are out of network. If you see someone several times a month, those costs add up,” North said. 

“I recommend clients keep at least $1,000 in their HSA as cash, sometimes $2,000 to $3,000 in cash, and then invest the rest,” she said. 

One concern that has been noted about HSAs are associated fees, which could entail anything from monthly maintenance fees to costs incurred for paper statements, outbound transfers and account closures, according to CFPB’s recent report. 

North noted that employers that offer HSAs as a benefit typically cover the fees, at least in part. 

“I think, like anything else, you have to be a consumer when you choose your HSA account,” North said of examining fees.

“Usually, if it’s through your employer, they will give you an HSA, because they are contributing the money into it. And a lot of times, the employer will cover the fees,” North added. 

She has found, however, that HSA providers often change their fee terms, which consumers and employers should be aware of.

“The other thing I’ve noticed about fees with HSAs, is that the financial institutions that offer them change their fees often. I think part of this is they are still trying to understand the market and trends. More than other types of accounts, I’ve seen institutions that administer HSAs change their terms or fees, maybe once every two years, whereas an IRA provider may change them once every decade,” North said. 

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