How to Harness Your HSA’s Superpowers

If you have a high-deductible health insurance plan, a health savings account can help you pay your medical bills. But HSAs have hidden superpowers that make them a great way for some people to create a tax-free pot of money for retirement or other long-term goals. In the right circumstances, you can even use an HSA to help your young adult children start saving for their futures.

Not everyone is a good candidate for a high-deductible health insurance policy, however. The minimum deductible that qualifies you to use an HSA is $1,400 for individual coverage or $2,800 for family coverage. Many plans ask you to contribute even more before coverage kicks in. If meeting the high deductible would be a hardship, or cause you to scrimp on health care, you’re probably better off choosing a lower-deductible policy and skipping an HSA.

If a high deductible policy is a good fit, you’ll need even more cash to take full advantage of an HSA: enough to pay the deductible and other health care expenses out of your own pocket, without tapping the account. That’s a pretty tall order, but you can still benefit from an HSA even if you have to spend some of the money along the way.

Here are the four biggest advantages to an HSA.

Superpower 1: You can get triple tax benefits

Heath savings accounts offer a rare triple tax break: your contributions are deductible, the money grows tax-deferred and withdrawals aren’t taxed if you have qualified medical expenses.

By contrast, withdrawals from other tax-advantaged accounts, such as 401(k)s, are typically taxed as income. If withdrawals are tax-free — as they can be from Roth IRAs — you didn’t get a tax break when you put the money in.

Superpower 2: You don’t have to spend the money

Any unspent balances in your HSA can be rolled over from year to year. That’s in contrast to flexible spending accounts, another tax-advantaged way to pay for medical expenses. FSAs require users to spend the money within a certain period or those contributions are forfeited.

FSAs allow you to contribute $2,850 in 2022. Individuals can contribute up to $3,650 to an HSA this year, while families can put in up to $7,300, plus there’s a $1,000 catch-up contribution for people 55 and older.

HSA contributions can be invested — and that means your money can really grow. Even if you have to spend some of the money along the way, the tax-free growth can add up.

Superpower 3: Any withdrawal could potentially be tax-free

As mentioned, withdrawals are tax-free if used for qualified medical expenses, including health insurance deductibles and copayments. The IRS maintains a list of eligible expenses ranging from acupuncture to X-rays. You can’t double-dip: Only eligible expenses that haven’t been reimbursed by another source, such as insurance or a flexible spending account, can justify a tax-free withdrawal.

The key thing to know, however, is that the IRS doesn’t require you to incur the expense in the same year you make the withdrawal.

As long as the expense occurred after you opened and funded the HSA, your withdrawal can be tax-free even if it’s years or decades later, says financial planner Kelley Long, a CPA, personal financial specialist and consumer financial education advocate for the American Institute of CPAs. You just need to keep the receipts for the qualifying expenses in case you’re audited by the IRS.

“I call this the shoebox strategy,” Long says. “You’re storing up your receipts because there is no statute of limitations on when you reimburse yourself for eligible expenses.”

You’ll want to guard against fading ink so you can actually read the receipts years later, so Long recommends making digital copies. She takes a picture of her eligible receipts and stores them in folders labeled by the year.

Superpower 4: You can jump-start your kids’ retirement

Typically, you can’t claim your children as dependents for tax purposes after they’re 19, or 24 if they’re college students. But many kids stay on their parents’ health insurance policies until they’re 26, which gives parents a unique planning opportunity, says Mark Luscombe, a principal analyst for Wolters Kluwer Tax & Accounting.

A child who’s not a dependent for tax purposes, but still on a parent’s high-deductible health insurance, can set up their own individual HSA. The parents can help out by giving the child some or all of the money to fund the account.

The child can’t set up their own HSA if they’re still claimed as a dependent on the parent’s tax return. And once the child is no longer a dependent, the child’s expenses can’t be used for tax-free withdrawals from the parent’s HSA. But this approach gives the child a tax deduction for the contribution and potentially decades of tax-advantaged growth — making it a super strategy for those who can swing it.