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How To Maximize Your Health Savings Account (HSA)

July 2019

By: Chris Risenmay, CFP®

Are you concerned about the rising cost of healthcare in the U.S.? That’s understandable as healthcare costs have increased by 7.4% per year since 2001, which is roughly twice the rate of inflation. Luckily, there are many tools like tax-advantaged healthcare spending accounts that you can use to prepare for costly healthcare bills. The Health Savings Account, or HSA, is one of the best tools to invest and prepare for healthcare costs. Some ways to maximize your HSA include taking advantage of payroll deductions, being aware of its relationship with Medicare, and using it as a supplemental investment account.

Payroll Deductions

Luckily, most employers allow employees to contribute to an HSA via payroll deductions. This method can make it simple to grow a significant HSA balance over time. Keep in mind that HSA contributions are pre-tax, meaning that these contributions won’t be subject to federal, state, or FICA taxes. This tax treatment is similar to 401(k) contributions, with 401(k) contributions still being subject to FICA tax, which funds Social Security and Medicare.

Be sure to ask your employer if they contribute to your account on your behalf, which ranges from $1,000-$2,000 per year. Employer contributions also prorate your total maximum HSA contribution. For example, a single person can only contribute $2,500 instead of the current limit of $3,500 if his or her employer contributes $1,000 to their account.

Relationship To Medicare

Medicare is an important government program that is funded by taxpayers and pays for healthcare expenses for senior citizens. Medicare and HSAs have a unique relationship that must be acknowledged. For example, you can’t contribute to an HSA if you’re currently covered by Medicare. Therefore, give your HSA provider proper notice to stop contributions if you’re planning on taking Medicare in the near future.

It’s important to note that you can still use your HSA balance to pay for qualified medical expenses after you take Medicare. These distributions will also be tax-free, provided the reason falls under the IRS definition of qualified medicare expenses. Also, distributions for other reasons won’t be hit with the 20% penalty once you turn 65. However, these will be subject to federal and state income taxes.

Supplemental Investing Account

Since distributions post age 65 won’t be hit with the 20% penalty, more investors are treating an HSA as a supplemental 401(k). Once they have sufficient funds, they invest on a pre-tax basis for retirement. HSAs might have lower limits than 401(k)s, but they aren’t subject to required minimum distributions or RMDs. RMDs apply to investors that turn 70.5 and require them to withdraw certain amounts each year, which can be determined with this calculator. Talk to a financial professional to determine your correct annual RMD amount, which will help you avoid stiff penalties.

It’s also prudent to learn about the various investment choices that you can utilize in your HSA. Also, ask your employer about the minimum account balance needed to invest in vehicles like ETFs or mutual funds. Usually, many HSA providers have minimum account balances around $2,000 before you can start investing in securities.

The Bottom Line

It’s no secret that the United States has expensive healthcare and that it’s impacting your personal finances. However, an HSA can be a great tool to plan for healthcare expenses and retirement simultaneously. Since any distribution after 65 won’t be subject to penalties, many younger investors are starting to realize the power of this tax-advantaged account and are using this account to invest for retirement. Be sure to make the most of your HSA via payroll deductions, understanding its relationship to Medicare, and consider allocating retirement funds to it.

Do you need assistance with your HSA or related topics? To request a free, no-pressure consultation, call our office today at 866.888.6563 or contact one of our offices today.

About Cypress Wealth Services

Cypress Wealth Services is an independent RIA firm providing financial planning and investment management to high net worth individuals, families, business owners, and institutions. Cypress Wealth Services is comprised of professionals with diverse backgrounds and extensive experience and qualifications. Cypress Wealth Services is uniquely qualified to serve a broad range of client needs. Their experience and expertise act as a foundation for their client service process, The firm uses The Second Growth, which focuses on efficiently protecting, growing, and transferring to their loved ones the wealth and legacy a person has already built. With offices in Palm Desert, CA, Tustin, CA and Anchorage, AK, the firm serves clients across the country in Wealth Management Services, Fiduciary Services, 401(k) Design, and Management, Investment Reporting Services, Financial and Retirement Planning and more. For more information: visit or call 760.834.7250.