If you’re on our physician Facebook groups, you’ve probably seen us mentioning the health savings account (HSA) when people talk about their financial plans and/or ask about tax strategies for W2 physicians. Since HSAs are triple tax deferred (the money is never taxed if done correctly), they are one of our favorite tax-advantaged account options for physicians.
Caveat: In order to take advantage of a health savings account, you have to be on a high-deductible health plan. You should never let the tax tail wag the dog, so if you or your family utilize a lot of health care, a strong insurance plan with lots of coverage is probably still the way to go. In other words, don’t pick a high deductible health plan just so that you can do the HSA.
Below, we cover why we love the HSA so much for physicians, as well as common related questions we’ve seen over the years within our online physician communities.
As always, note that we are not licensed in financial matters and you should consult appropriate legal, financial, and accounting expertise before taking action based on these ideas, which are not individualized to your personal situation. Though this information is accurate to the best of our (unlicensed) knowledge, you should confirm and make sure the information in this article is accurate and up to date on your own or with your advisors. To learn more, visit our disclaimers and disclosures.
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What Is a Health Savings Account (HSA)?
A health savings account (HSA) is a tax-advantaged savings and investment account intended to be used for healthcare expenses. HSAs are considered triple-tax advantaged accounts because:
You can put in pre-tax dollars, which lowers your taxable income
If you invest a portion–or all–of your HSA funds, the gains on these investments grow tax-free. This can be for decades if you want, as you aren’t required to spend the money in a specific timeframe.
You don’t pay taxes on the withdrawals from an HSA, assuming you spend the money in your account for qualified healthcare expenses. (You are also allowed to withdraw during retirement for non-medical expenses, but would have to pay income tax.)
Because of these tax advantages, as doctors who often don’t qualify for tax deductions or credits, we get very excited about HSAs! The goal of this account if using it as a stealth retirement account is to NOT spend the money in the HSA for as long as possible, allowing it to grow tax free.
That said, they aren’t a good fit for everyone. In order to qualify to use an HSA, you have to have a qualifying high-deductible health plan (HDHP). Given the higher deductibles and out-of-pocket maximums versus a PPO or HMO plan, a HDHP may not be the best choice for your particular family and medical situation if you need to utilize medical services often. Paying a ton out of pocket with post tax dollars today and then getting a much smaller amount in tax savings rapidly changes this from being a great idea to a bad one if you elect an HDHP just to have an HSA.
Special situation to be aware of: not all states are as HSA friendly as others. While you’ll never pay federal income taxes on your HSA if done according to the stipulations above, check and make sure that your state won’t charge income taxes on HSA contributions and growth.
FSAs vs HSAs
Health savings accounts can often get confused with flexible spending accounts (FSAs) as they are both tax-advantaged savings plans for medical expenses. They have some considerable differences, however, that should be addressed, including:
Unused FSA funds don’t roll over like HSA funds do. While we recommend maximizing your contributions to your HSA to let your contributions grow, you forfeit any unused FSA funds at the end of every year, so you should only put as much into an FSA as you plan to use.
HSA contributions are flexible throughout the year up to the contributions limit, but elected contributions to a FSA are fixed.
FSAs are strictly employer-sponsored plans, so individuals cannot sign up for FSAs outside of their employers.
HSAs and FSAs have different maximum contributions
FSAs do not let you invest the money that’s being held
How to Qualify to Open a Health Savings Account
As stated above, you must be enrolled in a HDHP. The IRS provides guidance on which health insurance plans qualify as a high-deductible plan based on the minimum annual deductible and maximum annual deductible and other out-of-pocket expenses. Not all HDHPs qualify for a health savings account.
Using 2024 as an example, the IRS imposed the following rules.
Self-Only Coverage | Family Coverage | |
Minimum annual deductible | $1,600 | $3,200 |
Maximum annual deductible and other out-of-pocket expenses | $8,050 | $16,100 |
Before signing up for a new HDHP plan or changing plans during open enrollment, double check that the plan you select states it is HSA eligible if you plan on using the HSA.
You are able to switch between eligible HDHPs and other plans with lower deductibles depending on your medical needs without losing your HSA or forfeiting your contributions, though you will only qualify to contribute to one in years when you’re covered by an eligible plan.
The Health Savings Account In Action
Setting up Your Health Savings Account
If your HDHP is provided through your employer, you can likely directly open and manage your HSA through your employer’s benefits website. This is a great perk because it makes it easy to contribute pre-tax funds before your employer calculates your earnings and reports them on your W-2.
If you are on an HSA-eligible HDHP but your employer doesn’t offer the HSA directly, you can still open an HSA yourself. There are several entities that offer HSAs, including brokerage firms such as Fidelity and banks such as Bank of America. These options are great for self-employed physicians with an eligible HDHP.
Once your account is open, you can fund your HSA every year you’re on a qualified high-deductible plan, based on the annual contribution limits.
Most HSAs will have a cash account where your and your employer’s (if any) contributions are deposited into. These accounts typically pay a minimal interest rate monthly.
Then they have a separate investing account. Funds can be transferred back and forth between your cash and investment accounts tax free.
Once you have funds in your HSA, you have a few options on how to use the funds you contribute:
Contribution Limits for Health Savings Account
With the amazing tax benefits of an HSA, it’s no surprise the IRS limits how much you can contribute annually. The IRS sets the annual contribution limit for HSAs. For 2024, the limits are:
$4,150 for self-only coverage
$8,300 for family coverage
This annual contribution limit assumes you were covered under an eligible HDHP for the entirety of the year. If you switched to a high-deductible plan during the year, as could be the case for graduating residents, you will need to prorate your contributions for the portion of the year you were eligible. This can be confusing, so to avoid penalties or taxes, discuss this with your accountant.
As part of their compensation package, some employers actually make contributions into their employees’ HSAs. Once you open your account, check to see if this is your situation. If so, you must count your employer’s contributions toward your annual contribution limit.
Overfunding a health savings plan can create a headache, so it’s much better to double check on the front end.
Should I Max Out My HSA?
If you have room in your personal finance plan to max out your HSA every year, it’s something we definitely recommend budgeting for, especially the younger you are. The more tax-free growth you can get, the more you can capitalize on this legal tax loophole.
Using Your HSA and Withdrawing Money from Your HSA
The IRS defines which medical expenses qualify for tax-free withdrawal (outlined below) and assesses penalties for withdrawing for non-qualified expenses.
Assuming your medical expense qualifies, withdrawals from your HSA can be made at any time without tax to cover these qualified expenses, as long as you have the proof of payment.
However, if you do withdraw money from the HSA before a set “retirement” age (65 as of 2024) for a non-qualified expense, not only will you pay income tax on that money, you will pay a whopping 20% withdrawal penalty, so we don’t recommend pulling funds from the HSA account except for qualified medical expenses.
After the retirement age, your HSA becomes more like other tax-advantaged retirement plans such as a traditional IRA or 401(k), which is why so many people refer to it as a stealth retirement account. At this age, you are able to withdraw funds for any reason without the 20% withdrawal penalty. There is still a reason to use it for healthcare related expenses, though, because if you use this money for non-healthcare expenses, it is subject to income tax.
A KEY point here is that you can choose when to get paid back for the healthcare expenses you incur throughout the years. A strategy many high-income earners such as doctors employ is to pay medical expenses out of pocket while maximizing their annual HSA contributions and investing the funds. This way, they can capitalize on the advantage of the tax-free growth.
Remember, you don’t have to get reimbursed in the year that you spend the money, and can claim these whenever you want, including decades later. Just keep track of your healthcare expenditures and save your healthcare expense receipts. This is as simple as creating a spreadsheet with your medical expenses, along with copies of the bills/payments.
If you are in the financial independence, retire early camp and are ready to retire before the IRS defined retirement age, you can actually use this HSA as a retirement account. You do this by paying yourself back for the healthcare expenses you’ve paid over the years and kept track of in your spreadsheet, thus using it like supplemental retirement income to bridge the gap between your retirement and when you become eligible to withdraw from your traditional retirement accounts without penalty.
Qualifying Medical Expenses
In order to withdraw funds from your HSA tax-free before the imposed age restriction (65 at the time of this writing), they must be used for qualifying medical expenses. These expenses include:
Primary care and specialists visits
Surgeries
Urgent care and hospital bills
Bills for lab testing and imaging
Prescription medications
Medical devices
While not all over-the-counter and self-ordered medical expenses are included, many are now with the passing of the 2020 CARES Act. If you’re an Amazon shopping veteran, you’ve likely seen the FSA/HSA label next to certain items. These now include items in the following categories:
Allergy & sinus relief products
Baby essentials & children’s health care products
Contact lenses
Cold, cough & flu items
Family planning items
Vitamins & supplements
Before using your HSA card to purchase these items, check your plan information, the IRS website, or with your HSA administrator for specific guidance to protect yourself from an accidental non-covered item at a 20% penalty.
In most cases, your insurance premium payments do not qualify as a covered expense, though this is different for a few situations such as Medicare and COBRA.
Investing Inside an Health Savings Account
Remember, while an HSA is a great way to help pay for medical expenses tax-free, our love for the account is that it’s a great tax-advantaged investment tool. We encourage you to take full advantage of the investment arm, assuming you can afford to pay the medical expenses with other money in the current year.
The more you do this, the larger the amount of money you’ll have growing with potential for decades of tax-free gains. You can invest similarly to how you do in your retirement accounts, as you don’t have to worry about taxes the way you do in your taxable accounts. If you need ideas for how to invest, you could consider something as simple as a three fund portfolio.
Other Community FAQs
We’ve covered the basics of an HSA, but we know it isn’t all inclusive. We’ve seen quite a few questions regarding HSAs within our physician communities. Below, we tackle a few of the most common questions we’ve seen.
Does an HSA make sense if I have high healthcare costs?
It can, but it depends on different factors, such as:
The difference in your premiums for a HDHP versus a PPO/HMO
If there are payment assistance programs available for expensive prescriptions that contribute significantly to your health costs
The medical needs of others within your household that will also be covered under the plan, as deductibles and out of pockets can stack quickly
Remember, you can switch to a PPO or HMO plan for a year or two if it’s advantageous (such as planned medical expenses that are expensive, like having a baby or having a surgery) without losing your current HSA. You will just have to pause contributing more until you get a HDHP again.
What happens to my accounts if I die with a balance?
HSA plans have designated beneficiaries, so make sure you set yours up appropriately and update them as needed. Your account can be transferred to your spouse tax free at your death.
If your beneficiary is someone other than your spouse, the balance will be transferred, but the account will no longer be treated as an HSA and your beneficiary will be taxed on the account’s market value.
If you saved your medical receipts for expenses you paid out of pocket, your heir will be able to inherit that amount tax-free within a year of your death with a record of your payments.
If I sell my investments inside my current HSA to rollover the funds, are there tax implications?
Not on a federal level, so long as you do a direct rollover and don’t withdraw any cash. HSAs are tax-advantaged accounts, so you don’t pay for any capital gains within them except in the situations outlined above. Remember though that certain states have different rules about how they do state income taxes in regards to HSAs, so check your state rules.
Are there tax implications of investing the money within my HSA since I have no medical costs?
In most cases, nope! That’s one of the major benefits of a HSA and why we love them especially for doctors with low to no ongoing medical expenses. Remember though that certain states have different rules about how they do state income taxes in regards to HSAs, so check your state rules.
What do you recommend for safe funds to invest in for first timers?
If you haven’t done a deep dive into our investing for physicians primer or our recommended reads on investing, a three-fund portfolio strategy may be a good jumping in point for your HSA investments. Whatever you decide to invest in, we recommend balancing your asset allocation across your entire portfolio including your other retirement accounts such as IRAs and 401(k)s.
Check with one of the financial advisors from our database if you need more individualized help choosing your funds, especially if you don’t have a comprehensive financial plan for your retirement goals yet.
Conclusion
While the HSA isn’t a slam dunk decision for every physician because of the requirement for a high-deductible health plan, it’s a powerful tax-advantaged strategy for those who can take advantage of it.
If you’re new to financial planning and investing, we have other resources and options for tax-advantaged plans to help.
Learn more about:
Personal finances primer for physicians, including other tax-advantaged retirement plans
Self-employed finances for physicians, including other tax-advantaged retirement plans