10 Reasons Why I Use a Health Savings Account (HSA)

The health savings account, or HSA, lowers the cost of your out-of-pocket medical costs by way of tax perks. You fund the account with pre-tax dollars, and qualified distributions for medical expenses are tax free. That's the account's headlining feature.

Dive into the details of how HSAs work, though, and you'll find much more to love. The tax perks are great, but HSAs are also easy to use and budget friendly, among other things. Here are 10 reasons why the HSA is a primary tool in my household's financial plan.

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My husband's employer matches HSA contributions up to $1,000 annually. That's $1,000 in free money for our household. We can use it for co-payments and coinsurance. We can also invest the contributions and build a long-term fund for our medical expenses in retirement.

To quantify that, investing $1,000 each year at an annual growth rate of 7% delivers a balance of nearly $44,000 after two decades.

If your employer, or your spouse's, offers HSA matching contributions, take the free money. Your own contributions are pre-tax -- so they'll cost you less than you'd think. To check the impact of higher HSA contributions on your paycheck, use a payroll calculator like this one. Test your HSA contributions on the pre-tax contributions line.

ALSO READ: 3 Big HSA Mistakes to Avoid in 2022

HSAs have the distinction of being the only account with a triple tax benefit. Your contributions are pre-tax, your earnings are tax deferred, and withdrawals for qualified medical expenses are tax free.

The differentiator there is the tax-free withdrawals for medical expenses. 401(k)s and traditional IRAs don't allow for tax-free withdrawals. Roth accounts do, but only because your contributions are after tax.

Sidestepping income taxes on the funds you use to pay medical bills can create huge savings over time. Say you spend $300 annually out of pocket on healthcare. If you're in the 22% tax bracket, you save $66 each year by using pre-tax money.

To contribute to an HSA, you must have a high-deductible health plan (HDHP). The IRS has parameters for what qualifies as an HDHP, including a minimum deductible. In 2022, the minimum deductibles for HDHPs are $1,400 for individual coverage and $2,800 for family coverage.

Whatever your health insurance deductible is, you should have enough cash on hand to cover it. That protects you against major illnesses and injury -- because your insurance isn't much help until after you fund the deductible.

The HSA functions perfectly as your emergency deductible fund. Some HSAs even allow you to withdraw more than you've contributed at the start. This way, you can cover your medical expenses as needed -- and then repay the funds later through your contributions.

ALSO READ: How to Handle Your High-Deductible Health Plan

Many HSAs come with a debit card, which makes it easy to access your funds. The debit card functions as you'd expect. You present it to pay for services and supplies not covered by your health insurance. Sign for the charges as you would with a credit card. The money is then scooped from your HSA account automatically -- no receipts or reimbursement requests required.

If a provider won't accept the debit card as payment, you'd cover the costs from your own funds and then request reimbursement.

Before I had an HSA, I would routinely forget to include out-of-pocket medical costs in my budget. Usually, it would be dental or vision-related expenses that would catch me off guard -- things like coinsurance on fillings or the cost of new eyeglasses. Unbudgeted expenses stress me out, even of the $50 or $100 variety.

Having an HSA forces me to budget for these items. The budgeting happens when I set the contribution amount. That contribution is based on current medical expenses plus an extra amount for long-term investing.

There's still the chance that current expenses will exceed my healthcare budget, of course. In that case, I could take the overage from my emergency fund or tap into the HSA funds earmarked for long-term growth. The right move depends on the situation, though I'd be reluctant to reach into my long-term HSA funds.

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Many expenses qualify for HSA reimbursement. For example, services provided by chiropractors, podiatrists, physical therapists, and psychiatrists can be reimbursable. You can also use HSA funds to buy over-the-counter meds (like ibuprofen) and supplies (like bandages).

The wide variety of qualified expenses provides many opportunities to use your tax-free withdrawals -- though you may want to set some limits on yourself. Without limits, it's too easy to spend all your HSA contributions and have nothing left for the long term.

Personally, I don't use HSA funds for smaller expenses I can easily absorb. I have used it to pay for chiropractic visits, dental work, and contact lenses.

ALSO READ: HSA-Eligible Expenses in 2021 and 2022

Paying taxes on your earnings from year to year slows your wealth production. Here's an example. Say you invest $500 monthly to earn 7% average annual growth. Defer the taxes for 20 years and your ending balance will be about $264,000. With no tax deferral and a combined federal and state tax rate of 25%, your ending balance will be roughly $228,000, or about $36,000 less.

The tax-deferred nature of the HSA is another reason not to spend 100% of your contributions every year. You get more value from the HSA by investing and making use of those tax deferrals.

Every year or so, a reputable research team will project average healthcare expenses for retirees. If you've never seen those reports, I'll warn you now: The numbers are shocking.

Fidelity has estimated that the average retired couple will spend $300,000 out of pocket on healthcare. Healthcare data company HealthView Services projects a much higher number at $662,156.

I don't know which estimate is more accurate, but both numbers are large enough to motivate me to increase my retirement savings target. They're also large enough to justify maxing out my HSA today and investing a good portion of those contributions for long-term growth.

Once I'm 65, I can withdraw funds from the HSA for nonmedical expenses without penalty. I will pay income tax on those withdrawals, but that's to be expected. The same is true for qualified retirement withdrawals from a 401(k) or IRA.

Since I can use the HSA for nonmedical expenses in retirement, the account also functions as a backup to my IRA. The timeline is longer. Taxable, penalty-free withdrawals from my IRA are available at age 59 and a half. But waiting until I'm 65 to tap the HSA encourages me to leave those funds invested and growing without year-to-year tax consequences.

Taxes are tricky for seniors. When you're on a fixed budget, giving up 20% or 25% of your income can be unsettling -- even unworkable. Worse, many seniors underestimate taxes in their budget. They might assume their tax rate will be lower once they leave the workforce. Or they may not know that up to 85% of their Social Security benefit is taxable.

Having a source of tax-free retirement income can ease the tax burden from year to year. If you don't have a Roth account, the HSA can provide that tax-free income -- at least to the extent you have medical bills. At a minimum, you can use tax-free HSA funds to pay premiums on Medicare Parts B and D or Medicare Advantage plans.

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Fund an HSA and you'll have access to tax-free medical expenses. But the account can also deliver so much more. Free deposits from your employer, an emergency fund that's earmarked for your health insurance deductible, and tax-deferred earnings growth are a few of the advantages.

Even better, there's no risk of overfunding your HSA. If you don't need the cash for medical expenses, you can take taxable retirement withdrawals and use the money some other way. Add some cushion to your retirement budget or fund activities on your bucket list. Once you pay the taxes, the money's yours to spend how you please.

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