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August 12, 2008


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So, if I'm understanding this correctly, there is a maximum you can contribute to an HSA each year, but not a maximum the account can hold? We are planning on starting a family in a few years, could I start plugging money in now and use it in a few years to offset the medical expenses of giving birth and newborn care?

Otherwise, this sounds like a great additional way to sock away some money for retirement!

Ha-- someone else has stumbled onto my HSA secret! I've had some pretty major bills (PRK eye surgery, dental work, etc.) that i could have used HSA funds for, but instead I've just been letting that HSA cash accumulate. I don't *need* the money now, and I might REALLY need to money later if some future ailment besets me, so it makes sense to just let it grow. If it turns out that my healthy lifestyle pays dividends when I'm old and retired and I don't need all that money for actual medical bills, I'll just pull that money out using the bills from over my lifetime and buy my grandkids more presents with it.

Ps. I'm 30, and I've been in an HSA for 3 years now.

Walden - you have to be covered by a high-deductible health plan to even qualify to put money into an HSA. Otherwise, you are correct, there is a annual limit set by the IRS but no overall limit for the account balance.

Thanks for the interesting post. Now that most of my major medical work has been done, I've been thinking of opening an HSA next year when open enrollment comes around. I didn't know you could save old receipts like this. I'm not sure I'll wait years for a reimbursement, but it does give me something to think about.

This is exactly what we're doing. We, too, make too much to qualify for saving in a Roth. Enter the HSA! We determined from the beginning that we would not put money in it only to take it right back out to pay medical expenses. It's accumulating until retirement, and I'm saving all the medical receipts I must pay out of pocket, to be reimbursed then.

I do know some people who get the high deductible policy so they can save $$$ on premiums, and even open the HSA account, but never contribute to it. Not only do they not have money growing in that account tax-free, they don't even have their deductible set aside for their ongoing medical expenses. This is NOT a plan!! If my annual deductible is $3000, I have that amount set aside, just in case. PLUS I send the max allowable to my HSA account each month and don't touch it.

So far, it's working for us!!!

My problem with the HSAs I found was high administrative costs and all of them required you to keep the first 2K in a low-yield savings account. Yuck. For my one year long, single, self-employed plan, that's pretty much all I was allowed to invest.

So, a "super" account with 90% of it tied up in low-yield savings? No thanks!

Very interesting...

I briefly researched my company's HSA and I found something a bit contrary:

Plan your contributions carefully
You will have a grace period until March 31,
2009 to claim reimbursement for eligible
health care expenses incurred in 2008. After
this date, Internal Revenue Service (IRS) rules require that you
forfeit any money left in these accounts.
Contributions cannot be carried over to pay
for eligible expenses you have in the following
year, and balances cannot be transferred
between accounts."

Unless I'm missing something, this rules me out... My questions is this: If the IRS requires that I forfeit any money left over in my HSA, how would that be different for anybody else? (FYI--I am a paystub/W2 employee for a Fortune 500 company...) Any ideas??

Great post! I used to be a tax professional so love these types of ideas!

Just a note to TheJapChap above--I don't think you are looking at an HSA account documentation--that sounds like a medical reimbursement plan through your employer--where you set aside $$ for expenses you expect to pay out of pocket that year. That is not the same thing as an HSA--which requires you to be in a HSA compatible high-deductible plan and does NOT require that you spend the medical dollars in the same year as withdrawals from the HSA. Medical reimbursement accounts have been around for a lot longer than these HSA's have--you may be referring to the documentation for that type of plan rather than these newer HSA provisions.

In response to TheJapChap, I work for a global energy company and was also puzzled by this post, so I reviewed my benefits. I do not have a HSA, at my company, we have a Flexible Spending Account (FSA).

In that type of account, it is use it or lose it. So I'm guessing that is also what type of account you have, we'll just have to stick with our other options!

HSAs can be a very good option for many people, however, since you need a high deductible health plan in order to contribute it is not always the best. If you don't have the cash flow to pay the up-front costs (especially if you have an existing health condition) you are better off in a traditional medical plan.

Thanks Syd & Neal for clearing that up!! I do have an FSA, not an HSA, which explains the verbage about forfeiture above... :-)

Thanks for all of your excellent comments to my guest post (and thanks to FMF for publishing it.) I am not surprised to learn that others have been doing what I am with the HSA funds. Those of you who are in an FSA plan, maybe you can persuade your employer to change it.

Rob G. - We funded the entire HSA deductible for our employees the first year and most of the deductible in subsequent years so they are actually better off financially with the HSA. The other benefit of an HSA plan is that it makes all of us better consumers of health care services because we are controlling more of the cash.

Do you think there's any way that those of us saving like dogs for retirement will find ourselves completely screwed over in the end? Like where roth will get double taxes if the govt goes into awful debt or we wont be entitled to other free services because we can afford them...

sometimes I feel all my saving will be in vain if the govt carries on the way its headed now :(

HSA is the biggest ripoff in history and this nonsense about a "super IRA" is irresponsible. The maximum yearly contribution to a HSA is less than my annual medicaine expenses! HSA is absolutely useless, and switching to one was the same difference as losing my insurance. How could you save money for retirement when you can't pay your annual medical expenses out of your HSA?

pink panther -

Just because it didn't work for you doesn't mean it can't work for others - as we've seen by the comments above. If your contribution is less than your medical expenses, then you've set you deductible too high. The whole point of the HSA is to allow you to put enough cash in the savings account portion of the plan to cover that deductible each year. Whoever sold it to you must have done a poor job explaining that.

As an added bonus my employer has matched the first $1000 of my contributiosn for the last two years. I did not realize you could save the receipts for future years. I might have to think about that. For now I am healty and do not have medical bills so my money will hopefully grow rapidly for the next 10 years before I need it.

Let me echo above the comment about high adminstrative fees. Unless you plan to stick in one for a while, they can really do a number on your funds. Does anyone know of the best providers of HSA services and how you do rollovers of that money? I purposely switched back to regular insurance because of my frustrations with my HSA provider who seemed to only be able to contact me properly when they wanted to charge me a fee.

Interesting. However, unrelated to the major content of this article, I think the author needs to study the definition of "above the line" & "below the line"

In response to the comment about the definition of "above the line", this is not an official accounting term.
This is from "Officially, these breaks are identified as adjustments to your income. But they are popularly referred to as above-the-line deductions because you subtract them on Page 1 of your 1040, just above the page's last line -- No. 37 on the 2007 return -- where you enter your adjusted gross income, or AGI."


Been doing the same thing for 3 years now. HSA has a value in excess of 10K right now.......... and it just keeps growing. My company actually presented this to the high income earners within the company as an additional weath building stratagy about 2 years ago......

I also have an HSA. I'm in my 20's and my medical expenses are at most $100-$200/year, including aspirin type expenses. My employer contributes some each paycheck and I also put in the difference in cost of a regular insurance plan. So it's the same amount of money out of my paycheck, but I get to keep it instead of throwing it away on insurance I don't use. While I'm not saving receipts and explicitly using it as a retirement account, I am planning that the funds will accumulate and grow to pay for my higher medical expenses in retirement. For me, it would be difficult to accumulate enough receipts to make the method viable. That may change as time goes by, but for now it makes more sense to use my Roth IRA since I have that option.

Great post. I am in a similar situation with income too high for a Roth and the ability to pay my medical expenses out of pocket. The premium for my family of four is much lower with the HDHP and I contribute the maximum to my HSA in Vanguard funds. I admit, the record keeping can be a pain. I've got a spreadsheet set up to enter every medical expense I pay out of pocket. I file the invoice away with the receipt of payment for future reference when I withdraw funds. (Hopefully way down the line). Although I also have a separate emergency fund set aside, I see this as a component of that. Available if I need it, or I can let it grow until retirement. Which is still 30 yrs away...

I think this is a great strategy, and my thanks for pointing out that the funds can be used to reimburse prior year expenses. That's a great trick!

One question: Can you reimburse yourself for expenses that you were able to deduct on your schedule A?

I'm confused. My company's HSA is "use it or lose it" at the end of the year. How the heck would I do what you're recommending?

Kimberly --

See the comments above -- you're likely confusing an HSA and an FSA.

Bob - you either claim the expenses as reimbursed from the HSA or claim them on Schedule A. You can't double-dip. However, if your income is high enough, you likely wouldn't qualify to deduct on Schedule A anyway.

One cost I'm not seeing you discuss is the opportunity cost you pay by not immediately getting the reimbursement funds for your current expenses. So if you paid $50 for a prescription this year, but don't cash it out for 10 years, the earning potential in the HSA and in an outside investment vehicle is roughly the same at best. If the HSA is designed to preserve principal, you could get better earnings outside the HSA by accepting more volatility in your investments. So the only real benefit you get from keeping your money in the HSA is the tax write-off. This isn't something to be sneezed at, but it kind of negates the whole argument that the HSA provides you extra earnings.

If there is a risk that the feds will raise tax rates resulting in higher taxes for withdrawals from 401(k)s and so on, there's a corresponding risk that they will start putting a time limit for filing HSA claims, so all in all, I don't think saving up your receipts is such a great idea.

Whether to use the excess contributions as a super-Roth depends on the investments available to you in the HSA and outside it. Most companies are only going to offer investments that guarantee the principal, since the intended purpose of the HSA is as a short term savings vehicle for health care, not a retirement fund. So you're looking at GICs, zero-coupon bonds, money market funds and so on. And many companies don't provide any earnings at all on the money in the HSA.

One interesting use of the HSA funding might be as a tax-free form of long-term care insurance. If you contribute excess funds starting in your 40s or 50s, you should have a decent nest egg piled up for when the medical bills really hit hard or when you or your spouse survive into your 90's and need assistance with everyday tasks. There's a lot that medicare doesn't cover, and given the funding situation for it, that's only likely to get worse.

Folks seem to be confusing FSA or HRA accounts with HSA accounts. If you don't have a high-deductible policy, you are not eligible for an HSA, but you can contribute to an FSA (flexible spending account) or HRA (healthcare reimbursement account). These accounts are only designed for you to cover current medical expenses, so they have a time limit.

The HSA is designed to encourage people to "self-insure" themselves for major medical expenses over a period of a few years. If you're lucky, you don't get hit with an emergency during the first few years and then you're covered. If you're really lucky, you don't get hit with an emergency for a long time, and you build up some nice savings. If you're unlucky you end up having to pay big-time out of pocket expenses before your HSA has built up.

This is a great explanation of how to make an HSA work for you. Roughly 50% of the people with the High Deductible Health Plans do not consume any health care in any given year. 75% use under $500.00 per year. This means that many of us could easily absorb the cost of healthcare and “shoebox” those receipts for the future. You did point out one weakness in the current system; the choice of investment options is relatively slim, especially if you don’t want to be required to hold $2,00 to $3,000 in a checking account. Health Savings Administrators offers first dollar investing and was selected by Kiplinger’s as one for the best HSAs for investors. You can check out the blog at .

The HSA seems to be part of the American way of solving the health cost problem, create a more complicated system of addressing costs. As all the comments suggest you really need to read the fine print. It no wonder the administrative portion of health care is so high, as well as the time and energy to properly analyze one's options.

If only this whole business could be simplified.

This is exactly what I am doing with my HSA funds. Now don't laugh - but here is my one concern. If we save all these receipts (aspirin, bandages, contact lens solutions, etc) for all those years, won't the ink fade to nothing before we need to produce them? Sounds trivial, I know. But it has happened to me with a bunch of home improvement receipts I saved to use when I sell the house.

Retired --

How about scanning them and saving them electronically as a backup?

Sure... the IRS will not oppose this. Is there tax law supporting your view or is this how you "read" the tax code.
Twenty ...Thirty years down the road you will have a big file of receipts and a angry spouse.

Any suggestions for a HSA bank or fund?. I looked at Wells Fargo but they had a lot of fees.

My company goes with HSABank -, yield on the savings is pretty low (in the mid 1%'s for a low balance). They charge a fee with under 3K in the account, but once you are over 3K there are no fee's just interest (I was getting 1.73% upu until I recently hit the 5K mark, now it's 2.22%).

The nice thing is the investment options aren't that slim - two options:

a) use TD Ameritrade, no fees charged to transfer money to TD, $50 to liquidate the account should you choose to do so (ie they want you to keep the money in there). They offer a lot of NTF mutual funds with no charges and loaded mutual funds don't have a commission either. No load funds they charge $25 for the trade. $15 for internet market orders for stocks.

b)a small selection of in house funds...flat $24/year to use this option no other fees.

I haven't moved anything out of the pure savings yet, but I will probably invoke the TD ameritrade one soon - assuming i can beat teh .5% rate bump it seems like a good idea to move the money in so I can at least choose some funds...

A nice idea but your receipts will probably degrade prior to use if you intend to keep them for 25-30 years. I would recommend photocopying them or scanning them with some sort of penciled code number on the actual receipt so you can show the IRS that yellowing receipt with no printer toner on it 20 years from now. My understanding is that alot of the current receipts are thermally printed which means they are like the old thermal roll paper fax printers where the printing degrades quickly...

Remember, too, HSA money can be used for Long Term Care needs. Having that stockpile may save you the need to get LTC insurance.

Is there any tax rule that would prevent me from opening an HSA for all the advantages stated above, and still contributing a modest amount to my company's FSA for incidental medical expenses during the year? I am not eligible for a Roth, but I would like another retirement savings option.

Did I understand correctly that my future medicare premiums may be reimbursed with HSA savings even though my current high-deductible premiums are not?

Is there such thing as an HSA that lets me self-direct funds into more aggressive individual stocks instead of mutual funds?

Thanks for the excellent idea!! But I am thinking the contribution limit for 2008 is $5800.00 for family plan.

An HSA can be a great way to go, but as commented above you need to be sure to know everything about your options before choosing one over the other. You MUST be on a qualified HDHP to have an HSA, otherwise you would have the FSA option. An HSA rolls from year-to-year and is an employee-owned account while the FSA is use-it or lose-it.

The 2009 contribution limits are $3,000 for an individual or $5950 for family with a $1,000 catch-up contribution if you are 55+.

Principal Financial has stand-alone HSAs that can be coupled with any medical insurance and they only require $1,000 to start investing in CDs and mutual funds. The monthly fee is $2, but with the potential tax-savings it more than makes up for it.

I have a HSA at my work, what I need to know is if I wait and use my money at retirement ,can it also be used for my spouse although the account is only in my name?

I am surprised that no one has caught the flaw in this strategy yet, or, may be, my thinking is wrong. Lets say you have accumulated $750 pre-tax money in your HSA account. Then, you get hit with a $750 medical bill. You have two options- A) Pay the bill using your HSA account with pre-tax money B) Pay the bill with your after-tax dollars.

This article suggests using option B and keeping a receipt for a later reclaim. Assuming a tax rate of 25%, option B costs you $1,000 pre-tax dollars. In other words, you have to earn $1,000 to get after-tax $750 to pay the bill. So it leads to a couple of conclusions:
1 - Your HSA account must grow to $1,000 before you break-even. Assuming a 6% rate-of-return, it will cost you 5 years to break-even alone.
2 - If you had paid using option A (using your HSA funds), you had the option to invest after-tax $750 in a taxable account and you would have about $1,003 after 5 years assuming a 6% rate-of-return. After paying 15% long-term capital gain tax, you would still net a profit of $200 after 5 years.

Taken 1 & 2 together, you have lost about $200 on a $750 medical bill after 5 years. I cannot understand that your strategy is a good one and you should be recommending it to anyone out there unless you can generate a super-rate-of-return, much higher than 6%, on your investments. Also, we have not even discussed the possibility of you withdrawing these funds from HSA account after age 65 for non-medical use and paying high-rate taxes on these gains being treated as ordinary income (ordinary-income tax rate is 35% now, and as you think, it may even be higher after 10 years). On top of that you have this hassle of keeping your receipts for a long time so that you can withdraw money from your HAS account.

Unless I have missed something (if I did, I apologize), you must reconsider this strategy of yours.

A better strategy will be to
• Max out your HSA account every year
• Keep your annual deductible in easy-accessible safe funds (like interest-bearing account or money market funds). This should easily earn around 3% rate-of-return
• Invest the rest of the amount in low-cost broadly diversified index funds
• Ensure to move enough funds from long-term investments or contribute as soon as possible to cover the annual deductible when a new calendar year begins

Hi Sanjeev,

Crunching your numbers, I get this:

Pretax income: 1750
Tax rate: 25%

Fund 750 into HSA
1000 pretax cash = 750 after tax

HSA = 750
Cash = 750

Medical expense = 750

Scenario A: Pay with HSA
HSA = 0
Cash = 750

After 5 years with 6% growth,
HSA = 0
Cash = 1003 - 37 capital gains = 965

Scenario B: Pay with cash
HSA = 750
Cash = 0

After 5 years with 6% growth
HSA = 1003
Cash = 0

It seems like plan B is the better one.

Shard - You need to compare apples to apples. You need to look at what you get in your hands after 5 years (assuming you use all that money after paying all the taxes). I assume that person is over 65 after '5-year period' in this question so that no tax penalty is taken into account. Here is what you will end up with:

Scenario A: Pay with HSA
HSA = 0
Cash = 750

After 5 years with 6% growth,
HSA = 0
Cash = 1003 - 37 capital gains = 965
Net in your hand: $965

Scenario B: Pay with cash
HSA = 750
Cash = 0

After 5 years with 6% growth
HSA = 1003
Cash = 0
Net in your hand: $750 is withdrawn from HSA using the original medical bill receipt + 258 (total gain in 5 years) - 88 (tax paid on gain treated as ordinary income) = 915

As you can see option A is significantly better than option B. A difference of $50 on $750 in 5 years with extra hassle of keeping receipts. Magnify that to a longer period and huge amount and one may be looking at a big difference.

The only situation in which option B is a better stategy than option A is when you one will use the accumulated funds in HSA to pay medical bills alone. That means one does not withdraw money for non-medical use. If that is the aim, option B has a good chance to come out ahead (assuming one can garner a good rate-of-return and use HSA funds sensibly over a long period of time). I would still go with option A if one can himself health, fund HSA account to maximum, use low-cost index funds, and cover annual deductibles in the begining of each year. Option A, used sensibly, will provide the best of both worlds. But again, it is subjected to individual approach & thinking.

Ah yes, I left out the assumption that the money in the HSA is used to pay medical bills, that's its purpose after all. Otherwise there's no point since you lose the tax advantage on withdraws. As long as the amount in your HSA is no greater than your actual medical expenses, you will come out ahead. This is especially advantageous as you get older and medical expenses rise.

Also, I wrote up my scenarios after reading your post where you stated that scenario A would result in a loss of $200 over scenario B. Hopefully with our two approaches to the same analysis, I've convinced you otherwise.

I am 61 and currently retired. I have a $5000 deductable policy. I save about $6500/yr by choosing the high deductable.
I have income, but no earned income that is necessary to contribute to an IRA.
Any pre-tax income that can be saved and generating interest, even if it ends up to be taxable is a plus for me.
My usual yearly expense is $1500. At that rate I could accumulate some $.

I am 61 and currently retired. I have a $5000 deductable policy. I save about $6500/yr by choosing the high deductable.
I have income, but no earned income that is necessary to contribute to an IRA.
Any pre-tax income that can be saved and generating interest, even if it ends up to be taxable is a plus for me.
My usual yearly expense is $1500. At that rate I could accumulate some $.

This is Sanjeev (again). I am back with what I would think is a controversial idea. Today I got a check from a medical service provider with a substantial amount stating that I had paid more than what I needed. I think they had sent out several bills including more than one time for the same service. I paid them all using funds from my HSA account. They realized that I had paid more than what was required. So, they sent me back a check for the amount that I overpaid. Good so far. The problem I have is that now I have this check (that is basically money coming out of my HSA account) that I can easily deposit into my regular checking account and use for anything without paying any penalty or anyone asking any question about it.

Here is my idea (and want to find out if it is really legal) - Send an amount more than what is required to medical service providers and receive money back (penalty and question free) that one can use for any reason (free pre & post tax money).

So, if I want to withdraw $100 from HSA account to help me buy a few DVDs, then I will send out a check to my medical service provider that will exceed the amount by $100. Later on, I should receive a check from my medical service provider for $100 that I am free to spend on anything. Is is really that simple? What do you think?

Well Sanjeev you can come up with a lot of this different ideas, but remember, that the hospital may send you a 1099,
or may never return your money.
And if the IRS finds out that people are doing things like this, you may end up with Madoff in the adjoining cell,
for a few $. All the calculations you and Shard are coming up, doesn't amount to much if you try to maximize your income and you pay the top Tax $.

You have a very interesting idea there. While the benefits that you describe are indubitably financially healthy, I have to wonder what the IRS would have to say about this. I know that your HSA can be used to reimburse the qualified medical expenses from the year before, but I did not consider that it could be used to reimburse you 20 years from the time you made the expenditure. Let's see how it all works out for you.

This is not something I would consider given the health care system's current state of flux. I understand that it's offered for the purpose of 'self-insurance' but, I hate to say it, but when the irs gets wind of these tactics, it will not be pretty. We cannot even try to predict what is in store that far into the horizon.

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