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When Should You Use Your Health Savings Account (HSA)?

3 minute read

We all run across all sorts of medical costs during our lifetime, some more than others. This leaves the challenge of how to pay for these medical expenses, especially if they result in a significant amount of money. Most taxpayers pay out of pocket or settle through their insurance plans.

However, thanks to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, there is also another option: a Health Savings Account (HSA). Even though an HSA is a great tool to pay health-related expenses, there are instances when it’s better to pay out of pocket.

When should you use an HSA for medical expenses and when should you pay out of pocket to allow your HSA to grow?

What is an HSA?

HSAs were designed for individuals who have health plans with high deductibles so they can save for any upcoming medical expenses. However, HSAs have evolved to act like a savings account, allowing you to set money aside and watch it grow into a retirement account.

How do HSAs work?

HSAs have two distinct advantages: (1) it’s a great way to set aside pre-tax money into an account to save up for future eligible medical expenses or, if you prefer, retirement; and (2) it offers significant tax savings because the interest gained from the account is tax-free.

For instance, you don’t pay taxes on the money that goes into an HSA or any money taken out that’s used to pay for eligible health care expenses. HSA funds used to pay for non-eligible expenses are penalized.

You can also invest the money in your HSA if you want to see more growth other than that from interest. Then, if you need access to those funds for medical costs, you can sell the investment and use the money available for any eligible health care expenses.

There are limits on the maximum amount you can put into an HSA on a yearly basis. For 2022, the maximum amount for an individual is $3,650 and $7,300 for a family.

Another nice thing about HSAs is not having to worry about losing any of the money in your account at the end of the year because your balance rolls over.

After you turn 65, you can use the money from your HSA for any purpose without being subject to a penalty.

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How is an HSA Funded?

Contributions can be made in several ways. If the owner contributes to the account they do not have to pay income tax. Similarly, if an employer contributes to the account the owner does not have to pay income tax. Someone else can also contribute to an HSA on behalf of the account holder.

How Do You Know When to Use HSA Funds?

There’s not a one-size-fits-all answer for when to use HSA funds. That’s because it all boils down to your personal financial situation. If you have money set aside or in savings to cover your medical expenses, then you’re better off leaving the money in the HSA and paying out of pocket. If you don’t have money set aside to pay for eligible health-related expenses, then it’s reasonable to use your HSA fund to cover these expenses.

This is because HSAs are optimized for tax-free growth. In fact, an HSA is one of the most tax advantaged accounts that you will ever have. For example, a key way in which an HSA is superior to a traditional 401(k) or an individual retirement account (IRA) as a retirement vehicle is because when you take money out of a 401(k) or IRA, you’re losing some of the money that would otherwise be available for compounding, tax-free growth.

Another good approach is to pay out of pocket for the small expenses and use the HSA to cover significant costs. This is another situation where you will have to define what a ‘significant cost’ would be based on your financial situation.


Can I use my HSA for COVID-19 tests?

The cost of testing for COVID-19 is an eligible medical expense that is covered under an HSA.

Can a HSA be used for dental expenses?

An HSA can be used for certain dental expenses, but not all. Typical expenses that are not covered by HSA include teeth whitening, cosmetic dental procedures, and general health items such as mouthwash and floss.

Can a HSA be used for dental cleaning?

Yes, dental cleaning is an eligible dental expense that qualifies under an HSA.

Can you use a HSA for a massage?

If the massage is a medical necessity for a certain medical condition, then you may use an HSA to pay for a massage.

Can I use my HSA for LASIK?

LASIK eye surgery is an eligible medical expense under an HSA.

Learn more about HSAs and how they can reduce your taxes at Corvee!

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