HSA Plan: Should I Invest in my HSA?

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Wondering how to optimize your financial picture? If you have access to an HSA Plan, find out everything you need to know here.

In this article

HSA Plan: Should I Invest in my HSA?

If you ever worked for an employer, I want you to think back to the first day of work. 

Did your heart pound against your chest as you walked toward your first full day at the job?

Did you worry about how you looked or how your future colleagues would perceive you?

If you said no – then that’s pretty awesome. Because I sure was nervous on my first day at work. 

I was so nervous that I walked to the office supply closet to pick up my pens, paperclips, binder clips, note pads, etc. and on my way back to my desk, I dropped everything right in front of the big boss. 

It was so petrifying. And to top it all off, it was not a rug floor to absorb the sound of the metal clanging onto the ground so the sound reverberated throughout the entire office. 

Everyone heard. I think my face turned a shade of very dark red.

Moving on from my first day at work drama – I also had to fill out several forms for my employer. 

Do you remember filling out paperwork after paperwork on your first day?

One of the forms that I remember reviewing was for an HSA account application. 

At that time, I had no idea what an HSA account was. 

It just looked like a bunch of gobble-dee-gook for me. In other words – it was like I was trying to decipher another language.

There were so many acronyms on the papers and documents! How was I supposed to know what it all meant? From an HMO to a PPO to an HSA, forget it.

So, my dear friends, I ask you: Do you remember on your first day (or first few days) of work if you were asked if you wanted to fill out an HSA account application form?

Were you wondering if it even made sense to invest in an HSA? Or if it would simply be a waste of your time and money?

Well let me tell you something – if you were wondering what in the world you were reading, then you are certainly not alone. 

Why would things be easy to read and understand when they could be made complicated?

Because I wish I knew earlier how incredible HSA’s can be, I want to share my knowledge with you. 

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What is an HSA?


A Health Savings Account, also known as an HSA, is one of the best-kept secrets in the finance world. 

I’ll explain more about this later in the blog post.

An HSA was first established in 2003 by the Medicare Act. So they are relatively new savings vehicles. Specifically, HSA plans are designed to benefit an individual as it relates to their health care expenses.

You, the employee, would have to establish the HSA account (your company would not do this for you). 

That’s why you will have to complete an HSA application form, where you initially establish the account for your health insurance plan. 

Once your HSA account is established, it works pretty similar to any other retirement account (let’s choose your 401(k) or your IRA for example). 

Just as with your 401(k) account, you will see a deduction from your weekly, bi-weekly, or monthly paycheck. 

You’ll see the deduction from your paycheck show up in your HSA account.

Moreover, you can also invest your HSA contributions. 

Just as with 401(k) plans, an HSA plan typically has only a number of investment options for you to select and invest your recurring contributions. 

If you have a health emergency, you can save your receipts and submit those later and receive a check for the equivalent amount from your HSA plan (all tax-free – more on that later). 

Pro Tip: For most HSA plans, if you have less than $1,000 saved, your contributions will likely sit in cash. 

After you crack the $1,000 marker, you’ll generally have the ability to select which investment funds you can contribute your recurring HSA contributions toward.

What are the requirements to open an HSA?


There is only 1 specific requirement as it relates to opening an HSA plan. 

That requirement is to maintain a high deductible health care plan (also known as HDHP). 

What is a High Deductible Health Plan (HDHP)? 

As the name already mentions, an HDHP is when you have pretty low monthly premium payments for your health insurance in exchange for a fairly significant deductible.

As a reminder, a deductible is the amount of money that you (the health insurance plan policyholder) have to pay upfront and out of pocket before your insurance provider starts paying for and covering your expenses. 

The lower the deductible, the higher your monthly premiums. 

The higher your deductible (as with the HDHP), the lower your monthly premium.

For the 2021 year, if you are only covering yourself (no family members), to fall under what is known as a high deductible health plan, you would have to maintain a health insurance plan with a $1,400 deductible. 

If you were covering yourself plus one or yourself and other family members, to fall under the HDHP, you would have to maintain a health insurance plan with a $2,800 deductible. 

Self-Only Coverage Family Coverage
Minimum Annual Deductible
$1,400
$2,800
Maximum Out of Pocket
$7,000
$14,000

So why doesn’t everyone select an HDHP to grab immediate access to an HSA plan? 

That’s because this type of plan does not make sense for everyone. 

Specifically, for those people who tend to come down with more illnesses and need more health and medical attention (which would be covered by their health insurance). 

If you are an individual who is more susceptible to health issues, then you may want to rethink using an HDHP plan for yourself. 

If you do use an HDHP plan, you may be stuck with some hefty high deductible bills depending on the number of doctor visits you have during that plan year. 

If you find yourself visiting the doctors more often than the average Joe, you may be better off paying slightly higher monthly premiums for a lower deductible. 

Ultimately, it’s personal preference.

However, another answer here is that it also depends on whether your employer offers an HSA and a high deductible health plan. 

If they don’t offer an HSA, then you are out of luck – there is nothing that you can do.

Let’s say that you decided against enrolling in an HSA when you were first employed but now are reconsidering that decision. 

You can always change plans – but talk to your Human Resource director first. 

How much can I contribute to my HSA plan?


This is a very common question – and the answer here is that it depends on the type of high deductible plan coverage you have.

If you are an individual covered through an HDHP, you can contribute up to $3,600 for the 2021 year (remember, each year the IRS typically adjusts the amount you can contribute to any account upward by $50 or $100. Just stay up to date with the IRS guidelines). 

If you are an individual but with family coverage through an HDHP, then you can contribute up to $7,200 for the 2021 year. 

Now here’s a twist: If you are 55 years old or older, you can contribute up to the maximum limits stated earlier (individual or family plan coverage limits) PLUS an additional $1,000 “catch-up” contribution per year. 

Self-Only Coverage Family Coverage
HSA Contribution Limits
$3,600
$7,200
HSA Contribution Limits at Age 55+
$4,600
$8,200

What happens if I leave my work?


So let’s say you started investing in your HSA plan. 

Let’s say your account balance has increased over the years – to the north of $20,000. That’s pretty awesome. 

Now let’s say you were just offered this incredible work opportunity. 

If you leave your current job – what would happen with the $20,000 you saved and invested in your HSA plan? 

The answer is simple: whatever you invest in your HSA plan is yours.

In other words, if you saved $20,000 and you leave your job (even if you were fired), that $20,000 is all yours. 

You’ll maintain your HSA plan at your old employer’s place but no one has access to that money except you. 

Pro Tip: If you do leave your work and keep your HSA plan with your old employer, you may be charged some insignificant account maintenance fees. 

Keep your eye out for those fees to be deducted directly from your HSA plan, but don’t be overwhelmed if you see this happen. 

It’s just part of the process.

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Triple Tax Benefit


I think one of the most compelling reasons why to obtain an HSA plan is due to the triple tax benefit this type of account will provide you – the employee. 

This is the best-kept secret that I was talking about earlier in the blog post. 

Below are the 3 tax benefits you will see if you enroll and contribute to a health savings account. 

Tax Benefit #1: Your Contributions are Tax deductible. 

This means that if you contribute $1,000 to your HSA plan, your federal income tax liability (in other words, the amount of taxes that you will owe to the government) will be reduced. 

That means more money in your pocket. 

Tax Benefit #2: Your HSA Money Grows Tax-Free.

Assuming you regularly contribute and invest in your HSA plan, your account balance will likely grow over the years. 

Let’s say you contributed $5,000 to the HSA plan and that your account has grown from $5,000 to $9,000 over the years. 

That means you have a $4,000 gain. 

This $4,000 will not be susceptible to taxes even if you withdraw this money down the road (for qualified expenses only).

Tax Benefit #3: Any Withdrawn Funds are Tax-Free*.

*Any of the savings and investments in your HSA plan can be withdrawn tax-free if and only if you are using those funds for qualified expenses. 

What are the qualified expenses? 

These are essentially any permitted expenses based on your specific plan. 

Typically, qualified expenses are based on guidelines per the IRS (so make sure you read the fine print). 

Ultimately, what the term “qualified expense” means is something that you can withdraw money from your HSA plan and not be taxed or penalized.

Yes, you can be penalized by 20% of the amount withdrawn from the IRS if the withdrawn amount is NOT going toward qualified medical expenses. 

– To learn more, read below. 

Pro Tip: If you are 65 years old or older, and you spend money on something other than qualified medical expenses – you will not incur a 20% penalty. 

You will, however, have to pay taxes (similar to the way you would pay taxes on withdrawals from a traditional IRA). 

What can I pay for with my HSA?


As I mentioned before, the IRS typically determines the types of qualified medical expenses from your health savings account. 

Some examples include: 

  • Long term care insurance premiums
  • Medicare coverage
  • COBRA premiums
  • Prescription medicine or drug
  • Insulin

Pro Tip: To make the most of your HSA plan – first pay for the qualified medical expenses with a credit card to rack up some credit card points. 

Make sure you keep your receipts for the qualified medical expenses and submit that receipt later and receive a reimbursement check from your HSA plan. 

That way you not only receive your HSA reimbursement but you also add some additional benefits through your credit card points (which could mean more money in your pocket).

What if I withdraw money from my HSA for non-qualified expenses?


That’s OK.

 

You can take out your money without any problem from your HSA plan – just don’t expect any tax benefits here. 

 

If you do take out money from your HSA plan to pay for a new car, for example, you’ll have to pay income taxes in addition to a hefty 20% penalty. 

 

I’ll let you decide whether it’s worth withdrawing money for non-qualified expenses from an HSA plan.

Qualified Medical Expenses Non-Qualified Expenses
Less than 65
No taxes
Taxes & 20% penalty
65+
No penalty
Taxes & no penalty

Closing thoughts


In the end, whether you decide to open an HSA plan is up to your personal health and financial situation.

That means if you are a relatively healthy (and likely young individual) and don’t visit the doctor too often, you’ll likely be better off on a high deductible health plan (HDHP), which qualifies you to enroll in an HSA plan. 

Your contribution limits to an HSA plan vary – depending on your age (age 55 and older have catch-up contributions) and depending on whether you are on an individual HDHP plan or whether your HDHP plan covers you plus one and/or you plus your family. 

If you do utilize an HSA plan, you will have a triple tax benefit

That means any HSA plan contributions will be tax-deductible (meaning you’ll have to pay less in federal income taxes), any growth in your HSA account balance will be tax-free (assuming you withdraw your HSA money for qualified expenses), and any actual withdrawals for qualified expenses will not be taxed, either. 

Moreover, if you are age 65 or older, you can withdraw money from your HSA plan for qualified or non-qualified expenses and not incur the hefty 20% penalty. 

You will still have to pay income taxes (if applicable).

Take some time and consider the pros and cons of an HSA plan. 

Your bank accounts will thank me later!

Tell me about your experience with HSA Plans and health insurance? 

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Fiona Smith
Fiona Smith
The Millennial Money Woman was founded by Fiona Smith. She holds her Master of Science Degree in Personal Financial Planning and has co-founded a local non-profit community teaching financial literacy to young professionals.

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