Health Savings Account Strategies

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Strategies to Manage Your HSA

HSA funding and distribution rules provide flexibility, allowing you to manage your HSA in a manner that best fits your financial goals and circumstances.

When should you fund your HSA?  How much should you fund?  How much should you withdraw?  When should you withdraw funds?  The answers to these questions depend on your personal situation -- involving factors such as your fund availability, your preferred investment alternatives and the value you place on convenience.

There's no one ideal way to handle your HSA -- and what suits you one year may not make sense for you in another year.  So it's nice to have options, including a broad choice of HSA administrators with varying investment options and fee structures.

Following are a few basic strategies for managing your HSA.  Maybe one will work for you.

Minimize Cash Flow

If your cash availability is low, or you have preferred investment alternatives, you may want to make minimal deposits to your HSA -- just enough to pay your qualified medical expenses with pre-tax money.

So, you only make HSA deposits after you incur qualified expenses.  You can deposit/withdraw each time you have an expense, or you can deposit/withdraw a single lump sum near the end of the tax year.

A person following this strategy doesn't need an HSA administrator providing the broadest spectrum of services.  They just need an administrator with a low minimum balance requirement and low fees.

Maximize Tax-Advantaged Savings

You can fund your HSA to the maximum and never withdraw funds until you're 65.  However, if you follow this strategy, there's a big trade-off:  You'll be paying all your qualified expenses with after-tax money rather than with pre-tax money.

This approach is more sensible for people in lower tax brackets -- for whom there's a more narrow difference between after-tax money and pre-tax money.  Also, this strategy has more attraction if you're expecting higher returns on your HSA funds -- for example, someone with a larger HSA balance invested in mutual funds rather than in CDs.

A person seeking to maximize their HSA savings would likely prefer a full-service HSA administrator offering a broad menu of investment options -- providing potentially higher long-term returns.

A More Balanced Strategy

Fully fund your account, or deposit as much as you can based on your budget.  Pay qualified expenses directly from the account, or pay with non-HSA funds and later reimburse yourself from the HSA.

This methodology allows you to maximize your tax deduction and minimize your out-of-pocket health care expense.  It's the approach that makes the most sense for the majority of people, and it's the strategy the government had in mind when HSA-enabling legislation was passed in 2003.

Other HSA Management Considerations