A Health Savings Account (HSA) is an excellent way to pay for medical expenses. But you may not know that in addition to great tax benefits, they can also be used in a number of creative ways to achieve a variety of financial goals.

1.  Triple tax benefits:  An HSA is the ultimate tax deferred account, combining the advantages of both a traditional and a Roth retirement account.  Contributions to an HSA are tax deductible when made (traditional), they grow tax free (both), and they are not taxed when distributed as long as they are used to cover qualified medical expenses (Roth).  Win, win win!

2. It’s YOUR money:  Unlike a Flexible Spending Account, which is a “use it or lose it” account, HSA money belongs to you.  It’s your account in your name, and it carries over from year to year. 

3. It can grow:  Funds in an HSA account can earn interest.  Once your balance gets over some minimum amount (usually about $2,500) it can be invested in mutual funds or other investment options.  These earnings stay within and increase your HSA balance.

4. It lasts forever:  Well, maybe not forever, but it lasts until you take it all out as distributions.  You don’t close the HSA when you change jobs or change insurance plans.  You don’t even have to close it if your new policy is not a high-deductible plan or you go on Medicare.  It can be used to reimburse eligible medical expenses until it gets used up. 

If you die with a balance in your HSA, it will pass to your spouse with no tax implications.  It remains an HSA, and he or she can continue to use the funds to pay eligible medical expenses accordingly.  If your death beneficiary is not a spouse, the funds can be used by the beneficiary to continue to pay medical expenses of the deceased for up to 12 months after death.  After that, the funds will be distributed to the beneficiary and taxed as income.

5. Catch-up contributions:  Just like a 401k or IRA, you can also make catch-up contributions to your HSA.  This means that you can sock away an extra $1,000 each year if you are 55 or older.

6.  Jump-start your HSA: You are allowed to make a one-time (per lifetime) transfer from a Traditional, Roth, SIMPLE or SEP IRA into your HSA account.  The transfer must be made from trustee to trustee and is considered a non-taxable rollover for the year you make it. The transfer cannot be more than the annual contribution you are allowed to make, so no double-dipping, but this does allow you to take advantage of existing IRA funds to get started.

7.  It can pay for prior year medical expenses:  As long as the HSA was established before you incurred the medical expense, an HSA can be used to reimburse that expense years later. For example, if an HSA was established in January 2021, and the medical expense occurred in February 2021, one could wait years before seeking reimbursement for that expense. The key is to maintain good records of the expense. To do so, you “must keep records sufficient to later show that the distributions were exclusively to pay or reimburse qualified medical expenses, that the qualified medical expenses have not been previously paid or reimbursed from another source and that the medical expenses have not been taken as an itemized deduction in any prior taxable year.” (Source: IRS Publication 969)

And that leads us to the following two HSA strategies.

8. An HSA is a great emergency fund:  With this strategy you continue to save in your HSA each year you are eligible.  If you can afford it, you pay all of your medical expenses out of pocket, AND you keep good records of those medical expenses.  Meanwhile, your HSA continues to earn interest and grow tax free.  If an emergency arises, you can simply seek reimbursement for those past medical expenses.  This provides the cash needed to cover the emergency.

9. An HSA is also a great retirement fund:  This strategy is a lot like the previous one in that you continue to save in the HSA, pay your medical expenses out of pocket and keep good records.  But now let’s say that you reach retirement age with years of unreimbursed medical receipts.  Reimbursement of these prior years’ expenses can now be made tax-free.  If you have more HSA than receipts, then any additional distributions will be taxable in the year distributed, just like an IRA.  But note, unlike an IRA or 401k distribution, you will need to be age 65 or older to avoid a penalty for early withdrawal.

10. An HSA can cover more than doctors and prescriptions:  Qualified HSA expenses also include dental and vision costs, such as cleanings, eye exams and glasses or contacts. Other eligible expenses are:  ambulance rides, dentures, breast pumps and supplies, chiropractor, drug dependency treatments, hearing aids, home care, lab fees, long-term care, birth control, medical equipment (wheelchairs), programs to stop smoking and more.  If you can get your medical professional to write a prescription for it, you could even use your HSA to put in a medically necessary hot tub!

11. An HSA can even pay your COBRA premiums:  Although the HSA cannot pay for usual health insurance premiums, COBRA premiums are an exception to this rule.

12. An HSA can also pay for Medicare premiums:  As with the COBRA exception, an HSA can also be used to pay for Medicare Part B, Part D and Medicare Advantage premiums, as long as you are 65 or older. Note that a Medicare supplemental policy, such as Medigap, is not an eligible expense. An HSA can also cover an employee’s premiums at work if they are 65 or older.

And now a couple of other important points:

13. An HSA is not compatible with an FSA (Flexible Spending Account):  You cannot establish or use an HSA if you have other health coverage that will pay for medical expenses before your deductible is met.  Sometimes this can happen when a spouse has an FSA.

14.  The HSA establishment date is critical:  Yes, you can wait years to reimburse medical expenses, but that expense must occur AFTER the date that the HSA is established.  So if you have a high-deductible health plan,  the best time to open an HSA is… NOW!