Underutilized Tax Strategy

Take Advantage of this Tax Deferred Savings Plan

As our clients finalize benefits enrollment and changes for 2015, consideration should be given to a Health Savings Account (HSA) and its potential triple tax-free benefits.  HSAs were initially designed to help people with high-deductible health plans get tax relief to pay for current medical expenses not covered by insurance. However, the tax deferred savings benefits can be extended over a lifetime.  Health care costs are escalating. The current estimated cost of medical bills for a couple during retirement is $283,000.  Even if you are not anticipating high medical bills in the near term or into retirement, clients should consider fully-funding their HSAs as an overlooked tax strategy.

Contributions to HSAs can total up to $3,300 for a single person ($6,550 for a family) in pre-tax dollars with additional $1,000 catch-up contributions for those ages 55 and older. Spouses can each have an account in order to make those catch-up contributions. That adds up to a total potential contribution of $8,550 per family if both spouses have their own HSA and are over 55.    As an example:  $6,500 contribution over 15 years at 7% return = $164,000.

Upsides of a Health Spending Account

  • You don’t have to spend your HSA money by the end of the year or lose it. Unlike many flexible spending accounts (FSAs), contributions can accumulate with no penalties.
  • HSA goes with you when you leave an employer. It has so much more flexibility than an FSA, and it earns interest.
  • You can invest your savings once your account holds a balance of around $2,000.
  • There is no vesting process. It is your money, and you can take it with you when you leave your job.
  • Most employers make additional cash contributions to HSAs.  These amounts can vary from a few hundred dollars for an individual to more than $1,500 for a family.
  • Your allowable HSA contributions have no bearing on your 401(k) or IRA contributions. You can make the maximum contribution to all three tax-deferred savings plans.
  • After age 65, there’s no penalty on withdrawals for nonmedical reasons. However, the money you take out is taxed as ordinary income, similar to a traditional IRA.

Whether you need extra money for medical or long-term-care bills over time or not, using your HSA as a savings cushion could be one of the smartest tax-free moves you can make.


  1. Charles Schwab
  2. Towers Watson Consulting
  3. Employment Benefits Research Institute

No content published here constitutes a recommendation of any particular investment, security, portfolio of securities, transaction or investment strategy. To the extent any of the content published may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. Consult your advisor about what is best for your situation.