To Spend or to Save: Ways to Use an HSA

As more employers offer high-deductible health plans (HDHPs), more people are opening health savings accounts (HSAs) to offset out-of-pocket spending. According to Devenir’s Year-End 2019 HSA Research Report, there has been a 348% increase in HSA ownership since 2011, going from 6.32 million to 28.32 million accounts in 2019. HSA owners can use pre-tax dollars to pay for eligible medical expenses, which is essentially like having a discount on all health care costs. They can also use the HSA as a savings and investment fund to create a solid nest egg for health care costs in retirement.

With so many new HSA owners on the scene, saving and spending patterns have emerged, and we want to talk about ways to use an HSA based on our own research and knowledge of the advantages of spending now or saving for later!

If you have an HSA but aren’t sure how to make the most of it, your main question may be: to spend or to save? We’ll give you the scoop on these options and let you decide what makes the most sense (or should we say cents?) for you!

The Spenders: Take Advantage of Tax Savings

Most HSA owners are spenders. According to the 2019 Visa Annual Healthcare Research survey, 44% of HSA owners spend all or most of their HSA funds every year on health care expenses. Of those spenders, half spend beyond their contribution amount each year. Spending HSA funds means saving upfront by getting the tax discount on purchases and by reducing your taxable income by the amount you contribute to your HSA each year.

HSAs are designed to be used in many ways, and for some, health care costs are a large portion of their annual spending, which means saving upfront is important. Because HSA dollars are pre-tax, eligible products and services you pay for with these funds are covered at a discount, so whatever tax bracket you are in is the percentage you are saving, which could mean discounts of 10% to 37%.

The 2021 deductible set by the IRS is $1,400 for individuals and $2,800 for families, and must be paid out of pocket before insurance will cover costs. Then an individual has a max of $7,000 and families $14,000 for out-of-pocket spending before insurance will cover 100% of the cost. The 2021 HSA contribution limit for individuals is $3,600 and for families is $7,200, which can help cover close to half of the possible health care spending a person might have in an HDHP situation.

If you have high yearly health care spending, an HSA can be an invaluable tool to help cover costs while keeping a little extra money in your pocket by using tax-free dollars instead of draining your personal savings or racking up credit card debt.

The Savers: Let HSA Funds Grow for Retirement

A smaller portion of HSA owners opt to save and invest their funds for the future. The Visa survey found that only 22% of HSA owners save or invest their money to let it grow into a nest egg for health care costs in retirement, paying for medical expenses out of pocket. Rather than take advantage of the discount HSA dollars offer when paying for health care, the savers prefer to let their HSA funds accumulate interest and compound over the years so that they can amass more savings faster.

This approach is ideal if you can pay your out-of-pocket spending from your household budget rather than HSA funds. Leaving your HSA funds largely untouched can reap big rewards down the line, especially if you invest them. Devenir’s Year-End 2019 HSA Research Report also found that only 4% of HSA account holders are investing, but those invested account balances are over seven times larger than non-invested average account balances. Consider the fact that compounded interest grows rapidly to appreciate the growth potential for untapped HSA funds. For example, if you invest $10,000 initially with a 5% interest rate compounding annually and let it go untouched for 30 years, you could potentially end up with $40,000—that’s $30,000 just from compound interest!

If you want to see how much your HSA funds can grow over time when you don’t spend, you can try out our HSA calculator to crunch the numbers for you. Put in your contribution amount, employer contribution amount (if this applies to you), your anticipated return on investment and interest rate, and your age to see an estimate of how much your HSA can accumulate by retirement when you don’t spend.

The Rainy Day-ers: Spend Some and Save Some

Then there are the HSA owners who take the middle road and spend some of their HSA funds and save some—we call these the “rainy day-ers.” According to the Visa survey, they make up 34% of HSA owners and can vary from spending a quarter to three-quarters of their HSA funds annually on eligible medical expenses, while saving the rest. Since HSA funds roll over year to year and are portable—will stay with you throughout your career even when changing employers or health plans—these HSA dollars will remain no matter what life brings your way. For those who can’t quite manage medical expenses without the support of HSA funds but want to save for retirement, taking a “rainy day-er” approach to spend some and save some might be a good compromise.

Rainy day-ers also do things like use their employer contributions for spending money while allocating their personal contributions for long-term savings, as one Visa survey respondent reported as a tactic. This can also be a great way to prepare for an unexpected emergency medical expense. Needing an ambulance or visiting the emergency room can be costly for those enrolled in high-deductible health plans, but having rainy day funds in your HSA can bring peace of mind should you suddenly incur an expensive medical bill.

Knowing you have funds for medical expenses now and down the line can be a more comfortable approach to using your HSA—after all, there’s no right or wrong way, just the way that suits you best!