health savings accounts 101

Ever toss and turn at night wondering about all the intricacies of health savings accounts? No? We didn’t think so. But, what if we told you that maybe you should.

How comfortable do you feel right now with your choices when making medical decisions? If there is something that has become far more complicated than it should, it’s health care and your access to clear information when it comes to your health care options.

It’s because so much of your financial well-being and financial independence depends on this answer, we’re unpacking this topic.

So let’s get to it. Here is everything you should know about health savings accounts:

Pretext: The Cost of Health Care

Every year, Fidelity comes out with their yearly Retirement Healthcare Cost Estimate Study. For 2015, this study found that the average 65 year old couple is expected to spend $245K over their lifetime in retirement on health care.

Wow. You don’t have to be an older person to be concerned about this staggering number.

High-Deductible Savings Accounts: A Quick Overview

A high-deductible savings accounts, also referred to commonly by their acronym HSA, allows you to pay for qualified medical expenses with tax-free dollars. Everything from doctors appointments, to prescriptions, to even over the counter medications can be paid for through your HSA, but you are responsible for paying more of your healthcare costs initially.

  • If you’re single, this means that your yearly health care deductible is $1,300.
  • If you’re married or a family, your yearly health care deductible is $2,600.

So, you’re out of pocket expense before your health insurance kicks in is higher than low-deductible insurance policies.

The benefits of a Health Savings Accounts are:

  • The money goes in tax-free and remains tax free when used on any qualified medical expense, forever.
  • They are portable and go with you no matter where you go.
  • You have complete control over the money that is in your HSA account.
  • You never lose the money that’s in you HSA account.
  • You may use HSA funds to subsidize your retirement income.
  • There is no required minimum distribution limits in retirement.
  • HSA funds used to subsidize retirement become tax-deferred and you pay income tax on what you distribute.

HSA Accounts and Triple Tax Advantage

Health savings accounts are also attractive in large part because you benefit from a triple tax advantage. Let’s bite into the tax advantages of high-deductible savings accounts a little bit more, because we really want to make sure this makes sense. With proper planning, you can legally avoid paying more taxes than necessary and HSAs are one such way that you can limit your tax exposure and maximize your earnings.

Here’s exactly how the triple tax advantage works in the case of high-deductible savings accounts:

  1. When you make account contributions to your health savings account it goes in pre-tax, which lowers the amount of taxable income in the year that you claim it as a tax-deduction.
  2. Your earnings are tax-free if they are used for medical expenses; tax-deferred if you save it for retirement. This means your earnings can grow in an HSA tax-free until you use the money in retirement, when you then pay income tax.
  3. If you use it for medical expenses, the money and its earnings are completely tax-free whether it was used in the current year or future years.

Sounds Too Good to Be True. What’s The Catch?

Before you get too excited, slow down and keep in mind that if your employer is highly subsidizing your healthcare plan, it may not make the most sense.

It will be smart for you to look beyond out of pocket costs of your employer-sponsored health care plan and determine how well you are covered. Is it more cost-effective to have a high-deductible insurance policy with a high-deductible savings account or a low-deductible insurance policy?

Another consideration, there are funding limits on Health Savings Accounts. In 2016, the funding limits are:

  • $3,350 max yearly contribution if you’re single
  • $6,750 max yearly contribution if your married or a family
  • $8,750 max yearly contribution if you’re married and over the age of 55

How to Take Action on a High-Deductible Savings Account

So how do you find the perfect health saving custodian? Who do you park your money with? November is open enrollment month, so now is a perfect time to start doing your research.

Here are a few things I recommend looking for in a HSA:

  1. Ease of use

Think debit card – a way that you can easily access your funds and use it on qualified medical expenses.

  1. Low maintenance fees and costs

Go for a custodian that doesn’t charge high fees to manage your account. The less you pay in fees, the more money you keep.

  1. Good long-term investment options

Consider an option that offer good long-term investment terms so that your money can grow while it’s in the account.

  1. Simple interface to track spending

You’ll want an easy way to track your spending, since you’ll have to report on how your HSA funds were used when you file your taxes. Look for ones that have mobile apps or client portals where you can easily pull reports or figure how who you spent the money.


Health savings accounts are effective accounts for paying for healthcare costs and they are attractive savings accounts as well to supplement your retirement. As with any financial decision, don’t make it in a vacuum and only consider out of pocket costs. Discuss whether this is a good option for you with your financial advisor so he or she can weigh the benefits and disadvantages within the context of your financial goals and situation.

Additional Resources

Here are the resources to help point you on the right direction for your research:

For ease of use, convenience, low cost and decent yield:

Your health care really doesn’t determine how happy and safe you will be in your financial future.  Bo and I are here to make you smarter and wealthier with your financial decisions.