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