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Are You Using Your HSA Wisely?


One of the more common opportunities for improvement I see when working with new financial planning clients is how they utilize their Health Savings Account (HSA). First created in 2003, HSAs allow individuals and families with high deductible health plans to set aside funds in a tax-preferenced manner for medical expenses. I like to think about HSA usage in a "good," "better," "best," manner. With that in mind, let's take a look:

  • "Good" HSA Usage - The first step to intelligent HSA usage is to, well, use them. Instead of just paying for healthcare expenses out-of-pocket, open and fund an HSA account. Contributions are tax deductible and moneys used to pay for eligible healthcare expenses can be withdrawn tax free.

  • "Better" HSA Usage - Great job, you've opened and funded an HSA acount at your local bank. And because you can pay for small medical expenses out of current cash flow, you don't need immediate access to your HSA account as soon as any medical need arises. Instead, you save and continue to accumulate funds for larger expenses down the road. All the while, perhaps your bank pays you a nominal interest rate.

  • "Best" HSA Usage - You've opened and funded an HSA account. You're also not spending it down and instead are paying for medical expenses, both small and large, out of cash flow. Finally, instead of simply growing your account with additional contributions plus, perhaps, some nominal rate of interest, you invest the account in a broad-based, low-cost index fund or target-date fund. Note, this may require moving your HSA account to a different custodian.

As you can see, there exists a hierarchy to HSA usage. For some, "Good" HSA usage may be the step you're on today, and that's okay. After all, it's better than "No" HSA usage. As your finances improve, moving on to "Better," and then "Best" HSA usage should be the goal. Of course, ultimately, you do want to spend your HSA account down. But there's seldom a reason to do this before you retire, if at all possible. Keeping this hierarchy of HSA usage in mind should provide anyone and everyone a better financial planning outcome. As always, if you have questions about your particular situation, just ask!

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