Six strategies to make the most of a Health Savings Account

By: Kimberly Lankford

A health savings account provides a triple tax break — your contributions are tax-deductible (or pre-tax if made through your employer), the money grows tax-deferred, and you can take tax-free withdrawals to pay eligible medical expenses at any time. HSAs can become even more valuable if you know some key strategies — helping you build tax-free savings to cover additional health-care costs in retirement or even serving as a back-up emergency fund. But despite the benefits, many people don’t take advantage of these special accounts — and some don’t even realize they’re eligible to start making tax-deductible contributions now. The following strategies can help you make the most of an HSA as a powerful savings tool.

1.Don’t miss out on an opportunity to make tax-deductible HSA contributions for 2019. If you have an HSA-eligible health insurance policy with a deductible of at least $1,350 for self-only coverage, or $2,700 for family coverage, then you can contribute to an HSA this year — even if your employer doesn’t offer an account (you can’t contribute to an HSA after you sign up for Medicare, however). If you have an eligible policy for all of 2019, then you can contribute up to $3,500 for the year if you have self-only coverage or $7,000 for family coverage (plus an extra $1,000 if 55 or older). If you had an eligible policy for part of the year, your contribution limits may be pro-rated based on the number of months you had eligible coverage.

You have until April 15, 2020, to make your 2019 HSA contributions. Your employer may let you make HSA contributions through payroll deduction, or you can open an account through many banks, credit unions and brokerage firms. See for a list of HSA administrators and information about their fees, investing options, and other features.

2.Consider the benefits of an HSA — plus any employer contributions — when choosing your health plan for 2020. If you have a choice between a low-deductible health insurance policy and a high-deductible HSA-eligible policy for 2020, consider the HSA’s benefits in addition to comparing the premiums and out-of-pocket costs for both policies. In 2020, an HSA-eligible policy must have a deductible of at least $1,400 if you have self-only coverage, or $2,800 for family coverage.

In addition to the tax breaks for your contributions, you may also get free money in your HSA from your employer. Some employers match their employees’ HSA contributions or give HSA money to anyone who signs up for a high-deductible plan — large employers contributed an average of $632 to employees’ HSAs in 2019, according to the National Business Group on Health.

3. Find out about frequently overlooked expenses that are eligible for tax-free withdrawals. You can withdraw money tax-free from an HSA for out-of-pocket medical expenses, including any deductibles and co-payments for medical care and prescription drugs. You can also use the money for vision and dental care and other eligible medical expenses that aren’t covered by insurance.

You can even withdraw money tax-free from an HSA to pay a portion of eligible long-term care insurance premiums based on your age — such as $790 for people ages 41 to 50 in 2019; $1,580 for ages 51 to 60; $4,220 for ages 61 to 70, and $5,270 for ages 71 or older. (Most standalone long-term care policies are eligible, but hybrid long-term care/life insurance policies usually are not.) And after age 65, you can also use the money tax-free to pay for Medicare Part B, Part D and Medicare Advantage premiums.

For more information, see IRS Publication 969, Health Savings Accounts.

4. You’ll get the biggest tax benefits if you keep the money growing in the HSA for the long run. An HSA is very different from a flexible-spending account. Both let you withdraw money tax-free for eligible medical expenses, but the HSA doesn’t have any use-it-or-lose-it rules — there’s no time limit for using the money. You can take HSA withdrawals to cover current medical expenses, and most plans provide a debit card to make it easy to access the money. But you’ll get the biggest tax benefit if you keep the money growing in the account for future expenses. In that case, make sure you invest the HSA money for the long run — many HSA administrators let you invest in mutual funds for the long-term, rather than just offering a savings account, but be careful of investing fees.

5. Use the HSA money as a tax-free savings plan for health-care expenses in retirement. Even though you can’t make new contributions to an HSA after you sign up for Medicare, you can withdraw money tax-free for eligible medical expenses at any age. And you can also make tax-free withdrawals after age 65 to pay premiums for Medicare Part B, Part D and Medicare Advantage plans. You can even take tax-free HSA withdrawals to reimburse yourself for Medicare premiums you paid directly from your Social Security benefits; just keep records of the expenses.

6. If you keep the right records, you can withdraw money from the HSA tax-free at any time, providing a back-up emergency fund. If you withdraw money from an HSA for non-qualified expenses before age 65, you’ll have to pay a 20% penalty in addition to taxes on the withdrawal. The penalty disappears after you turn 65, but you’ll still have to pay taxes on non-qualified withdrawals.

But you may be able to withdraw some money from the HSA tax-free at any time if you’ve kept good records through the years. There is no time limit for withdrawing money from the HSA for eligible expenses you incurred since you established the HSA. If you paid for those expenses in cash at the time, you can withdraw the money tax-free from the HSA years later to cover those bills — giving the money more time to grow without the drag of taxes in the account. Some health plans and HSA administrators have web tools that make it easy to keep track of eligible expenses and how they were paid, so you’ll know how much is available for tax-free withdrawals in the future.

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