4 Tips for Managing Your HSA Wisely

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With just a little savvy, you can get the most from your HSA by managing it wisely. Image © Blend Images/Hill Street Studios/Getty Images

Managed wisely, a Health Savings Account is a great savings tool that can help you achieve financial security, even out the budget roller coaster caused by health insurance cost-sharing, and help you save for retirement. Managed haphazardly, your HSA won't reach its full potential.

Choose Your Health Savings Account Custodian Wisely

Most banks, credit unions, and even some insurance companies offer HSAs.

However, not all HSA custodians are created equal. High fees and custodial charges eat away at your earnings and even erode the money you contribute, so choose your custodian wisely. Things to consider are:

  • Fees
  • Interest and investment options
  • Convenience

Get a complete schedule of the fees associated with the account. Custodians can charge fees for things like opening an account, monthly account maintenance, using a debit card, and certain types of account activity. If you’re presented with a bundled fee, ask if there are additional fees not included in the bundled fee.

Take your lifestyle and how you’ll use your HSA into consideration when choosing a custodian. For example, if you’ll be using your account to pay for small, frequent medical expenses like monthly prescription refills and copayments, a custodian that doesn’t allow you to use a debit card, or one that charges a fee each time you use the debit card, won’t suit you well.

If you plan to use your HSA primarily as a retirement savings tool and only use it for medical expenses you can’t otherwise afford, you’ll want to consider the investment options each HSA custodian offers. For example, some custodians won’t allow you to invest until your account balance exceeds a minimum level.

Some severely limit your investment options. Others are more liberal with both investment options and minimum account balance needed to begin investing.

Don’t Nickel & Dime Yourself Poor.

If you’re using your HSA for long-term savings, your account balance will grow more quickly if you don’t withdraw funds for small medical expenses. Consider paying small expenses, like a $35 copayment or a $40 prescription fill, out-of-pocket rather than dipping into your HSA. The tax savings you’ll forgo on these small amounts likely won’t make much impact on your overall financial picture, but you’ll notice the impact on your HSA balance in the long run.

Don’t Miss Out on Investment Income.

Many people allow the money in their HSA to remain in a cash-like holding rather than investing it more aggressively. They’re afraid they may need access to the money quickly and having to liquidate securities would cause an unacceptable delay.

While this may be wise if your account balance is small, once your account balance is higher than the out-of-pocket maximum for your health plan, consider investing the excess in a more aggressive manner consistent with your investing goals.

Once you’ve reached your health plan’s out-of-pocket maximum, the plan will begin to pay for 100% of your covered medical expenses for the rest of the year. This makes needing immediate liquidity in your HSA much less likely for the remainder of the year.

HSA Balance Too Low? Use This Smart Move When You Have Medical Bills.

Let’s say you’re new at dealing with an HSA. You’re having $100 taken from your paycheck and put into your HSA each month; so far you have $600 in your account. At this rate, you’re not going to reach the maximum allowable contribution for the year.

Now, you have an accident and get a medical bill for $2,000. You haven’t met your deductible yet, so your health insurance won’t be paying any of this bill. You can use the $600 in your HSA, but you’ll still owe $1,400 that you’ll have to pay out-of-pocket.

Rather than paying the $1,400 then and there, a smarter move is to make an immediate deposit of $1,400 into your HSA. Your HSA balance will then be $2,000 and you can pay the entire bill with the funds from your HSA.

By running the $1,400 through your HSA before paying, you’re saving on taxes. For example, folks in the 25% tax bracket could save about $350 in taxes by simply running the $1,400 through their HSA.

Why run the money through your HSA when you could just take it as a tax-deductible medical expense at the end of the year? Because you can only claim medical expenses that exceed about 10% of your income. Unless you’re really low income, your $1,400 won’t meet the threshold necessary to be deductible. However, the money you contribute to an HSA isn’t counted as income…you’re not taxed on it. You don’t have to exceed any threshold.

If you have to come up with $1,400 to pay your medical bills, you might as well save $350 in taxes. Two caveats: make sure your HSA custodian accepts bulk contributions, and make sure you won’t exceed the maximum allowable contribution for the year.

 20142015
Yearly HSA Contribution Limits
Self-only coverage under age 55$3,300$3,350
Family coverage under age 55$6,550$6,650
Self-only coverage age 55+$4,300$4,350
Family coverage age 55+$7,550$7,650

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