You’ve gone and done it. You’ve switched (maybe for the first time ever) to a high deductible health plan (HDHP). The plan can save you money, but you’ll need to navigate a Health Savings Account (HSA)—a special type of savings account that comes with your new plan. Along with helping you cover the higher up-front costs of your HDHP, an HSA has a lot of benefits for your health and wealth stability.

The HSA triple tax-benefit:

  • Tax deductible deposits and pre-tax contributions
  • Tax exempt growth through interest and investment
  • Tax free withdrawals for qualified expenses

Now that you have access to an HSA, how do you make the most of it? We’ve got the scoop!

Setting up your account

Start by setting up your account and determining your contributions.

1. Choose an HSA Administrator: Your employer, health insurance carrier, or bank might offer an HSA, or partner with a company that does. Your HR team will send you information on setting up your account, as well as whether they contribute to your HSA. Each employer can set this up a little differently, so talk to your HR team to make sure you are taking full advantage of their match.

If your employer does not offer an HSA, you will need to choose an HSA administrator. Compare their account fees, investment options, interest rates, and minimum balances. Since you could have your account for some time, a little forethought here goes a long way—small differences in your returns will add up! HealthCare.gov recommends using a website like HSASearch.com to help you with your research.

2. Complete a short application to secure the account. You will want to explore the account management options available (e.g., web portal, mobile app) to make contributions, request reimbursement, and change investments. Typically, you can work with your employer to set up regular contributions via monthly pre-tax payroll deductions (a great way to ensure that you are regularly growing your balance). If an employer contribution is available, be sure that you know the amount, and check the IRS’s annual contribution limit each year so that you can adjust your own deposits accordingly.

Tips and Tricks:

Keep these details in mind to help you maximize your returns:

  • Invest your HSA: Not only can your HSA earn interest like any savings account, you can also invest your HSA in stocks, bonds, and other assets. Your balance even grows tax free when invested!
  • Use it like an IRA: At age 65 you can withdraw from your HSA for any expense, just like your IRA or 401(K) income! Since HSAs carry a triple tax benefit, it can be advantageous to max out your allowed contributions and save the money for retirement (See IRS contribution limits above). This way, you take full advantage of the tax benefits as your balance grows.
  • 401K vs. HSA: Not sure whether to invest in your HSA or 401K? It’s generally good practice to start by putting enough away in your 401(K) to take advantage of any company match, then funding your HSA, and only returning to the 401(K) if you have reached your HSA contribution limit says Peter Stahl, CFP at Schwab IMPACT.
  • Eligible Expenses: Even before you reach 65, you can use your HSA to pay for more than just your deductible and prescriptions. Eligible expenses include COBRA premiums, orthodontics and dental visits, eyeglasses, long term care, and hundreds of health-related products.
  • Catch up contributions: If you share a joint HSA with your spouse, make sure to split your accounts when you turn 55 so that you can both take advantage of the $1,000 catch-up contribution if you have the income.
  • Reimbursement window: Your reimbursement for qualified expenses does not have an expiration date. If you keep receipts, you can reimburse yourself years later if necessary.
  • Emergency fund: While your HSA is clearly intended for health expenses, in an emergency you can withdraw from it for other purposes. Note: these withdrawals carry a 20% tax penalty, and so your HSA should not be used as a rainy-day fund if possible.
  • Non-payroll deposits: It isn’t just your pre-tax contributions that get a tax break; any HSA contributions that you make are tax deductible, so make sure to keep a record of these deposits so you can claim them on your tax returns!

Potential Pitfalls

  • Your HSA is designed to help you cover the cost of your high deductible. However, unless your employer offers a sizable company contribution early in the year, you might not have enough saved to cover unexpected out of pocket expenses early on. Try to make a deposit right when you open your account, and leave a little in your HSA at the end of the plan year so you have a buffer when your deductible rolls over.
  • If you leave your qualifying HDHP, or get coverage from Medicare, you can no longer make deposits into your HSA. You can keep your balance, but you may not add to it.
  • The higher up-front cost of an HDHP is meant to encourage plan members to compare prices more carefully than members of traditional plans. In practice, searching for better healthcare prices can often be incredibly difficult. However, federal regulation requiring hospitals to make their prices for common services freely available recently went into effect, so shopping around should get much easier.

A note: your HSA strategy may change as you age

Just as your 401(K) deposits and investment strategy change over time, so too should your HSA strategy.

  • Early in life, many employees don’t have enough income to max out their HSA contributions. They might also use their health savings for over-the-counter health products rather than medical expenses.
  • As earning potential increases in middle age, many account holders can maintain a higher balance, and their HSA starts to become a buffer against unexpected expenses – like having to suddenly pay their entire family deductible.
  • Older HDHP members, absent of mortgages and college tuition, often focus on growing their HSA in preparation for retirement. Since you can no longer make deposits to your HSA on Medicare, and medical expenses skyrocket in old age, taking advantage of those catch-up contributions can be important!

Whatever your financial situation, it is important to continue working with your HR department to determine the plan that best meets your needs. Your HSA strategy and your optimal plan will likely change throughout your lifetime, but the good news is that you aren’t stuck! You have the opportunity to reassess your saving, investments, and plan options as you go.