How to Spend from a Health Savings Account: 9 Ways to Maximize Your HSA

Health Savings Accounts (HSAs) are powerful tools for managing medical expenses while providing significant tax advantages. They are often referred to as “triple tax-advantaged” because contributions reduce taxable income, earnings grow tax-deferred, and withdrawals for qualified medical expenses (QMEs) are tax-free. Whether you’re just starting with an HSA or looking to optimize its use, here are nine effective ways to spend and manage your HSA funds.

1. Use Your HSA Debit Card

The simplest way to access your HSA funds is by using your HSA debit card. This card allows you to pay directly for QMEs such as doctor visits, prescription medications, and dental treatments. The funds are withdrawn from your available cash balance.

Pro Tip: Keep a cushion of cash in your HSA to cover expected healthcare needs. This ensures you’re prepared for medical expenses without disrupting any investment strategy you might have for your HSA funds.

2. Pay Bills Online with Fidelity Bill Pay (or Similar Services)

For those with an HSA through Fidelity, you can use the Fidelity Bill Pay service to manage payments for QMEs. This includes scheduling one-time or recurring payments and setting up eBills for eligible providers.

Convenience Matters: With mobile app integration, you can pay bills on the go and set up reminders to ensure you never miss a payment. This option is particularly useful for managing recurring medical expenses like therapy sessions or monthly prescriptions.

3. Reimburse Yourself

If you’ve paid out-of-pocket for QMEs, you can reimburse yourself from your HSA—even years later. This flexibility allows you to prioritize growing your HSA savings while keeping the option to access funds when needed.

Rules to Follow:

• The expense must have been incurred after opening your HSA.
• It cannot have been reimbursed through another source or used as a tax deduction.
• Keep detailed records, including receipts, as the IRS may audit your reimbursements.

4. Take Your HSA with You

Unlike other health accounts, HSAs are portable. This means your account remains yours even if you change jobs or retire. You can also transfer your HSA to another financial institution without losing any funds. HSAs also don’t have a “use-it-or-lose-it” policy, so you can carry forward any unused balance indefinitely.

Flexibility Factor: You can spend, save, or invest your HSA funds regardless of your current health plan status.

5. Invest for Tax-Deferred Growth

One of the most overlooked advantages of HSAs is the ability to invest your funds. If you’ve saved more than you need for current expenses, consider investing the surplus in stocks, bonds, or mutual funds. The earnings grow tax-deferred, providing a robust way to save for future medical expenses or even supplement retirement income.

Plan for Growth: Use the annual inflation-adjusted contribution limits to your advantage and aim to max out your contributions. Over time, these investments can help cover rising healthcare costs during retirement.

6. Bridge the Gap to Retirement

If you retire before age 65 and need to cover healthcare expenses, your HSA can be a lifeline. Eligible premiums you can pay with HSA funds include:

• COBRA continuation coverage
• Health insurance during unemployment
• Medicare premiums (excluding Medicare Supplement policies)
• Qualified long-term care insurance (subject to limits based on age)

No RMDs Required: Unlike 401(k)s and IRAs, HSAs do not require minimum distributions, allowing you to control when and how you use the funds.

7. Use Funds for Non-Qualified Expenses After Age 65

Once you reach age 65, your HSA becomes even more versatile. While withdrawals for non-medical expenses are subject to income tax, the 20% penalty no longer applies. This allows you to use your HSA funds for other purposes, such as travel, home improvements, or even gifting to family.

Strategic Use: Treat your HSA as a backup retirement account by focusing on saving and investing during your working years.

8. Reduce Taxes in Retirement

You can continue contributing to your HSA in retirement if you’re not enrolled in Medicare. For individuals aged 55 and older, catch-up contributions allow for an additional $1,000 annually. This benefit extends to both spouses if they maintain separate HSAs.

Tax Deduction: Contributions are tax-deductible, reducing your overall taxable income—a significant advantage for retirees managing fixed incomes.

9. Pass Your HSA to Beneficiaries

HSAs can also be a part of your estate planning. If you name your spouse as the beneficiary, they inherit the account tax-free and can use it for QMEs. For non-spouse beneficiaries, the account balance becomes taxable income in the year of the account holder’s death.

Efficient Planning: Consult with a financial advisor to create a tax-efficient strategy for passing on wealth while maximizing the benefits of your HSA.

Maximizing the Potential of Your HSA

HSAs are more than just a way to cover medical bills—they are a versatile financial tool for saving, investing, and planning for the future. By understanding the various ways to spend and grow your HSA, you can unlock its full potential and integrate it into your overall financial strategy.

If you’re eligible for an HSA but haven’t opened one yet, consider taking the first step today. It’s an investment not only in your health but also in your financial well-being. For current HSA holders, these nine strategies can help you optimize your account, whether you’re focused on immediate needs, long-term savings, or retirement planning.

Remember, the key to success with an HSA lies in understanding the rules, maximizing contributions, and aligning its use with your financial goals. With careful planning, your HSA can be a cornerstone of your financial health for years to come.