Why Spending Your HSA Account is a Rookie Move

by Craig Keohan

Lately, my inbox has been full of information from various HSA providers about which items are included as qualified medical expenses that can be covered using funds from your HSA. While it is true that you can pay tax-free for chiropractors and contact lenses, using your HSA as the first go-to funding mechanism for current expenses will cost you dearly in the future. 

So, why are companies encouraging their account holders to spend when saving and investing are far more powerful uses of the account? Some even go so far as to suggest recategorizing HSAs as “health spending accounts.” (I would say to those administrators that if you want to change that nomenclature, they should look toward our Canadian neighbors where they do offer Health Spending Accounts.) 

HSA tax advantages are fully realized when the money is added through payroll deduction (or a contribution is made after taxes and deducted on your tax return), and when it is invested for tax-free growth. If the money is simply deposited and spent, the most beneficial tax advantages are wasted.

Suggesting that you spend your HSAs accounts down every year is purely a financial play to increase the corporate bottom line.  Yes, those administrators are significantly incentivized to produce transactional fee revenue, hence the push. But what’s in the best interest of the consumer? This approach is serving an injustice to the HSA account holder and is a highly misguided strategy.   

A recent survey conducted by HealthSavings reveals that there’s still a lot more we should be doing as an industry to educate people on the advantages of an investment-focused HSA. A whopping 60% of investment advisors surveyed are still not offering HSAs as part of comprehensive retirement strategy.  

“It’s baffling,” says William G. (Bill) Stuart, author of HSAs: The Tax-Perfect Retirement Account. “The advisors are recommending that their clients contribute to accounts that impose income taxes on either contributions and distributions. HSA owners aren’t taxed on either end. Why hasn’t every investment firm integrated an HSA into its platform and educated every advisor so that they can help clients understand that the next dollar of retirement contributions may well go farther in an HSA than a qualified retirement account?”

Here’s why you should be investing your HSA:

  • On average, Medicare beneficiaries’ out-of-pocket healthcare costs consume 41% of their Social Security income. And, for the average couple retiring at 65, those non-Medicare-covered medical expenses can total up to $363,000. By investing an HSA, account holders can build up a medical nest egg to pay for those costs tax-free, rather than forking over taxes if they were to pay with 401(k) or IRA funds. 

  • The 2019 HSA contribution limits are $3,500 for self-only coverage and $7,000 for family coverage. If you contributed the annual maximum limit to your HSA and invested it from age 30 until 65, you’d have over $530,000 under self-only coverage or over $1,098,000 under family coverage. Even if you started at age 50, you’d still have over $119,000 under self-only coverage or over $226,000 under family coverage*.

*These calculations assume a 6% rate of return, and 2% annual CPI increase.

A health savings account should empower and provide the option for consumer-driven health plan participants to invest all their health benefit dollars in institutional-class funds, so they can grow their savings tax-free and meet their financial goals for a happy, healthy future. By choosing an option that offers mutual funds with lower expense ratios and no trading fees, HSA accountholders can save up to five times more than the industry average, so they’ll be ready to manage healthcare costs incurred in the last one-third of life. Now that’s a “pro” move.

About the Author

Craig Keohan is chief revenue officer for HealthSavings, a leading HSA provider. As Chairman Emeritus of the American Bankers HSA Council and founding executive of the first HSA / MSA administrative companies in the country, his passion is to help those who are confused to get it right. He believes the HSA consumer deserves clarity that the HSA account is called a Health SAVINGS Account for a reason.