How to Use My Leftover HSA Funds: Smart Ways to Maximize Your Savings

Understanding Health Savings Accounts

A health savings account, or HSA, is a tax-advantaged savings account that allows you to set aside money for qualified medical expenses. By contributing to this account, you reduce your tax liability, and the money within the account remains untaxed even when it collects interest.

In fact, HSA funds are considered to be "triple-tax advantaged." Because money within the account remains untaxed, your contributions reduce how much you'll pay in income tax, and the funds remain untaxed if used for qualified medical expenses.

HSAs are designed to work with High Deductible Health Plans, or HDHPs, to provide a safety net for medical expenses. Not only does this work well with the account's various tax benefits, but it can also yield long-term savings.

The funds in your HSA account can be used to pay for a wide range of medical expenses, including doctor visits, vision care, prescriptions, and X-rays.

Managing HSA Funds

While the benefits of HSA funds are immense, the account must be properly managed to actually enjoy them. Poor management will result in you paying more taxes and, overall, decreasing future benefits.

Part of good HSA management is paying for eligible medical expenses with funds from the account when possible. Unused funds will remain safe within the account, so don’t hesitate to call upon them when necessary.

Investing in your HSA is a good idea for more than just covering medical expenses. For example, these accounts earn interest without being taxed, meaning your account will grow even when you aren’t contributing. Plus, as you get older, your HSA account will open up and allow you to use the funds for more than just medical expenses.

How you choose to manage your account is up to you, but there are three ways people typically use them. The first is to treat it as exactly what it is: an account designed to save money on medical expenses. You can roughly calculate how much you’ll likely spend on medical expenses the next year, put that much or a bit more into the account, and use it as necessary. A drawback of this idea is that you likely won’t be maximizing the benefits this account type provides to its fullest.

Another way to use the account for the same purpose as in the first, but more shrewdly. Put enough into the account to cover expenses for a few years, and then draw only on those funds for large expenses. With this system, major procedures like surgeries would be completely covered, but you’d have to pay out of pocket for smaller doctor or dentist visits.

The strictest management method is to invest the maximum amount and use it as little as possible until you can use it for your retirement. People who do this treat their account more like a 401(k) or IRA than an HSA for medical costs. Of course, it can still be used for this purpose, and may be used in case an emergency arises, but it's mostly viewed as future security under this system. All three can work, so choose the one that's most appealing to you.

HSA Eligible Expenses

As mentioned, HSA-qualified medical expenses cover a wide range of medical costs. Hospital stays, prescriptions, and doctor visits are some examples, but there are many more. Vision expenses, dental care, X-rays, motorized wheelchairs, and even some over-the-counter medicines like ibuprofen or acetaminophen are also covered.

HSA funds can also be used to cover some commonly overlooked medical expenses, such as Medicare or COBRA premiums. Other healthcare-related costs may also be covered. You should double-check with your provider before using the account to make sure you’re using it correctly. Some HSAs also cover expenses unrelated to healthcare, though these are likely subject to penalties and income tax.

It isn't always easy to know whether you're using your funds correctly or wisely. This is what makes keeping medical receipts so important. You can prove you are doing what you're supposed to with these records. You could also ask a professional for help and use these receipts as reference points if you're unsure. 

Retirement and HSA

A massive benefit for many people looking to get an HSA is the ability to use the funds during retirement. After you turn 65, your HSA account opens up to you. Before, the funds could only be used for various medical expenses. Now, though, they can be used for just about anything. However, funds not used for medical expenses are subject to income tax. Use them with this in mind, and you’ll be alright.

It’s vital, therefore, to consider all HSA funds as part of your retirement plan. Combining them with your 401(k) and IRA in your plan will help you remember to treat it carefully and only draw on it when necessary. One way to consider it in your plan is to treat it as a medical treatment payment account first, and an emergency fund second, if at all.

A significant benefit for many is that it can help cover the long-term costs associated with aging, such as home health care or nursing home stays. If you properly manage the account when you’re young, you’ll be able to benefit once you’re older.