Stocks — Part XXV: HSAs, more than just a way to pay your medical bills.


Much has been changing in the world of health care here in the US. While the opinions on these changes vary widely, one thing I can say with some certainty is that the number of people having access to and choosing High-Deductible Health Insurance Plans is likely to increase. These plans basically allow you to “self-insure” for part of your health care costs in exchange for lower premiums.

In the past, most health insurance plans came with very low deductibles and paid for most every medical cost beyond them.

Those were the good old days.

As medical costs have skyrocketed, so have the insurance premiums required to provide such comprehensive coverage. Now, by having the insured (that is to say, you) shoulder some of the risk, the high-deductible plans are able to offer insurance against catastrophic illness and injury at more affordable rates. In exchange the insured (you, again!) is responsible for paying the first medical bills out of pocket each year, typically $5-10,000. To make this a bit more affordable and attractive, Health Savings Accounts (HSAs) were created to help handle these out-of-pocket expenses.

Basically, these are like an IRA for your medical bills and, as we’ll see, the way they’ve been constructed creates some very interesting opportunities.

With an HSA, as of 2014, you can set aside up to $3300 for an individual and $6550 for a family each year. Like an IRA, you can fund this account with pre-tax money. Or, put another way, your contribution is tax-deductible. You can open an HSA regardless of your income or other tax-advantaged accounts to which you might also be contributing.

Here are some key points:

  • You must be covered with a High-Deductible Health Insurance Plan to have an HSA.
  • Your contributions are tax deductible.
  • If you use a payroll deduction plan through your employer, your contribution is also free of Social Security and Medicare taxes.
  • You can withdraw the money to pay qualified medical expenses anytime, tax and penalty free.
  • Any money you don’t spend is carried forward to be used when you need it.
  • Qualified medical expenses include dental and vision, things often not part of health care insurance plans these days.
  • You can use your HSA to pay the health care costs of your spouse and dependents, even if they are not covered by your insurance plan.
  • If you withdraw the money for reasons other than medical expenses, it is subject to tax and a 20% penalty.
  • Unless you are age 65 or over, or if you become permanently disabled; in which case you’ll owe only the tax due.
  • When you die, your spouse will inherit your HSA and it will become his or hers with all the same benefits.
  • For heirs other than spouses, it reverts to ordinary income and is taxed accordingly.


This is also a good moment to point out that, while HSAs are often confused with FSAs (Flexible Spending Accounts), they are not at all the same. The key difference is that with an FSA, any money you don’t spend in the year you fund the account is forfeited. The money in your HSA, and anything it earns, remains yours until you use it.

What we have here is a very useful tool, and one well worth funding for those who have access to it. But as promised above and as might be said on a late-night TV infomercial…

Wait, there's more

Remember how I said this creates some very interesting opportunities? Some additional key points:

  • You are not required to pay your medical bills with your HSA.
  • If you chose you can pay your medical bills out-of-pocket and just let your HSA grow.
  • As long as you save your medical receipts, you can withdraw money from your HSA tax and penalty free anytime to cover them. Even years later.
  • While those who plan to use this money to pay current medical bills are best served (as with all money you plan to spend in the short-term) keeping it in an FDIC insured savings account, that’s not the only option.
  • You can choose to invest your HSA anywhere. Such as in index funds like VTSAX.
  • Once you reach the age of 65, you can withdraw your HSA for any purpose penalty free, although you will owe taxes on the withdrawal  unless you use it for medical expenses.

As we sit back and ponder all this, an interesting option occurs.Suppose we fully funded our HSA and invested the money in low-cost index funds? Then we’d pay our actual medical expenses out-of-pocket, carefully saving our receipts, while letting the HSA grow and compound tax-free over the decades.

In effect, we’d have a Roth IRA in the sense that withdrawals are tax-free and a regular IRA in the sense that we got to deduct our contributions to it. The best of both worlds.

If we ever needed the money for medical expenses, it would still be there. But if not, it would grow tax free to a potentially much larger amount. When we are ready, we can pull out our receipts and reimburse ourselves tax-free from our HSA, leaving any balance for future use. And should we be fortunate enough to remain healthy, after age 65 we can take it out to spend as we please, just as with our IRA and 401K accounts, paying only the taxes then due.

And how about those nasty RMDs discussed in Part XXIV? Well, so far the law has been silent on this point. It could go either way. Keep your fingers crossed.

The bottom line is that anyone using a high-deductible insurance plan should fund an HSA. The benefits are simply too good to ignore.

Once you do, if you choose, you can turn it into an exceptionally powerful investment tool. I suggest you do.

Addendum 1:

My pal, The Mad Fientist, calls this “Hacking your HSA” and he has created this cool graphic illustrating it:

I suggest you click anywhere on the above to see his full post describing the process,

as well as his post The Ultimate Retirement Account.


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Important Resources

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  1. EA_Mann says

    Great explanation, though part of me wonders whether this is too good to be true. It has some of the makings of a loophole, and I could see the IRS closing it with a simple rule stating something like “thou shalt pay for medical bills using HSA in the year they are incurred if possible”.

    There would still be a benefit, but not the ultimate benefit described here.

    • jlcollinsnh says

      Thanks EA…

      Yeah it does seem like something that slipped thru the cracks. But it will take Congress to change the law now, not the IRS.

      In any event, we have it now. As the poet says: “Gather ye rose buds while ye may…” 🙂

  2. Jon S. says

    Anoher gem from Uncle Jim, the friendly adversary of Uncle Sam. 🙂 As benefit enrollment will soon be upon many of us wage slaves/ working stiffs, this post provides food/fodder for thought. Yet another tool for would-be FIRE starters.

  3. Bryan Wilkerson says

    I do not see the advantages of paying out of pocket. Help me understand. If my tax rate is 30% and my medical expense is $1,000. If I use my HSA I am paying $700 after tax and I could invest the $1,000. Plus, I expect my tax rate to be much lower at 65 so what is the math on not using my HSA?

    • Rick says

      You’ll notice more than once he said save the receipts from your out of pocket payments. You’ll also note that he said you can make withdraws for medical expenses even years after the fact.

      I believe the idea is to save the receipts as a kind of rainy day fund. Lets say you average $1000 dollars a year in medical expenses. You save those receipts, Then 10 years later you lose your job. and need some money to stay afloat. You can then go and make a 10k withdrawl tax free when you submit those receipts.

    • jlcollinsnh says

      Hi Bryan…

      The idea is that you can contribute to your HSA, take a tax deduction on your contributions and have them grow tax free until you withdraw them. By paying your medical bills out-of-pocket now you can extend the time for that growth to occur. Depending on your age, that could be decades for compounding to work its magic.

      Plus what Rick said in reply and Done by Forty says below.

  4. Done by Forty says

    The HSA might be my favorite account, ever. You get to contribute tax deferred but use the money like it’s already been taxed, if it’s for medical expenses. And there are usually a couple decent investments to choose from.

  5. Chris says

    Jim, this is a great hack! I’ve dealt with the HDHP + HSA combo and I wanted to mention that with some HSA’s you will only earn a measly interest rate much like a savings account.

    If you want to invest in securities you want to make sure the HSA you choose has that option – some offer only mutual or index funds (like VTSAX) while others offer CD’s or even individual stocks.

    Be sure to note any monthly HSA maintenance fees – some waive fees altogether or based on keeping a certain balance.

      • Levi says

        Hi I appreciate all your work and amazing information.
        I would like to ask if you can suggest a specific company where I should open a hsa account? With lowest fees… investing option in vanguard or the most similar. ..

    • Denise says

      Great points on the pitfalls of HSAs… Below are my personal examples as back up:

      The few times I’ve had them through employers: they often have a monthly fee ($3 on Optum Bank, $30 on Chase) until a minimum balance is reached ($1k on Chase,$6k on Optum). On the Optum HSA, the funds available for investing were as limited and high in fees as a 401k. I wasn’t actually able to choose my own funds like a brokerage account. And on the Optum HSA, you have to meet a minimum INVESTMENT amount ($6k… which would take 2 years for a single person to contribute to that level or one year for a married person to contribute for the couple… all the while incurring the minimum balance monthly fees). Unfortunately, the fine print on these funds was not published anywhere (I looked!) and I got to find out after I signed up when they mailed me all the fine print. By then, it’s too late: you elected for the high deductible health plan because you wanted to contribute to the HSA. The tax/investment benefits are gleaned by the HSA fund management company… I lost track of that Chase account and by now the funds in it have been eaten away by the $30/mo fee and might not make the balance worth rolling over to the Optum account.

      On both accounts, I wasn’t able to invest unless I maintained a minimum cash balance of $2k. The amount above that could be invested. Another point I read was that the HSA is prorated. If you don’t have the high deductible health plan for the majority of the year, you can’t max out the HSA. So for people who like to front load their tax-deferred accounts, make sure you don’t switch to an HMO/PPO partway through the year without adjusting your HSA contributions.

    • jlcollinsnh says

      Great question, Dan!

      And so far I’ve been unable to find a definitive answer. IRS Pub 969 on HSAs is silent on this:

      My guess is that you can use investment income. I say that because the rules on needing to have earned income to contribute to an IRA are so clear and there is apparently nothing about this for HSAs. But this is only a guess.

      I’m putting the question to some of my other sources and will report back should I learn more.

      For now, you might want to ask the investment firm where you’ll be holding yours and see what they say. If you learn anything please let us know.

      Meanwhile, maybe some of my readers have some insight….?

  6. Eric says

    Great explanation of the benefits of an HSA. Two additional points may be worth noting for people like myself in a situation where their employer offers an FSA but not an HSA:

    1. It is possible to privately establish an HSA even if your employer does not offer it as an option (as long as you have a high deductible insurance plan), BUT

    2. You cannot have both an HSA and a health care FSA (except for limited expense health care FSAs that only apply to certain very limited expenses like dental and vision).

    So, don’t sign up for your employer’s general health FSA if you want to take advantage of the benefits of opening an HSA.

    • jlcollinsnh says

      Thanks Eric…

      For my money, if I can only have one, HSA is it.

      Although, thanks to LR below, I gather you can now carry $500 forward in an FSA. Used to be “use it or lose it” in the year you contributed.

  7. LR says

    With an FSA, you are allowed to carry-over $500 to the next year. I believe this law just changed within the last year

    • Eric says

      Note that the change in law only permits employers to allow employees to carry over up to $500 (it doesn’t automatically become a feature of every health FSA), so you need to make sure that your particular employer has adopted this change for its FSA plan before you rely on it.

  8. VK says

    My wife is covered by a medical plan at her employer. That plan doesn’t qualify for HSA contribution. However, the plan I have with my employer qualifies for HSA contributions and I’ve been making them for a couple of years. Can I pay my wife’s medical expenses using my HSA? We file our taxes joint.

  9. Liz in NH says

    One question I have about HSAs is, if you pay for medical costs out of pocket and allow your money to continue to grow, only the amount of the qualified expense can be withdrawn tax-free, correct? If I have a $2,000 medical expense and do not withdraw the funds from the HSA right away, the $2,000 can be withdrawn tax-free just like a Roth IRA. But what about the gains from the $2,000? Are the gains from that qualified expense also tax-free, or are they taxable at the age of 65 if used for non-medical expenses? If the gains are taxable, I’m not sure that I understand what the advantage is of an HSA over a traditional IRA. I feel like I am overthinking this, so any insight would be appreciated!

    Love your blog, btw! I have learned so much from you!

    • jlcollinsnh says

      Hi Liz…

      All the money in your HSA, contributed and earned, is available anytime to pay qualified medical expenses tax and penalty free.

      After age 65, you can withdraw and spend it anyway you see fit, but if it is for other than medical you’ll owe tax on the amount you withdraw. Just like an IRA after age 59.5.

      Plus you can have an HSA in addition to any other tax advantaged plan like an IRA or 401k.

      Make sense?

  10. Sundeep says

    Stoked that I have an HSA which I never really check on, but bummed that I don’t have any good mutual fund choices…I wish my company offered Vanguard funds

    Alas, most are not only around 1% expense ratio, but several have front end loads…ugh!

    • jlcollinsnh says

      It is often the same problem with 401k plans: poor investment choices and high fees.

      I’d pick the best of the bunch, being sure to avoid those with loads, hold my nose and go for it. As we concluded in this post:

      The tax benefits out weigh the fees.

      You might also campaign to get your company to improve the choices offered.

      According to IRS publication 969, you can also establish the HSA through a trustee that is different from your health plan provider.

      Unfortunately, Vanguard does not offer direct HSAs at this time.

  11. dodojojo says

    The “Invest entire HSA towards low cost index” part is the issue for me. My company sponsored HSA plan requires a minimum of $2,000 be kept in the savings account. And for that I’d receive a measly 0.1-0.2% interest. I joined my company this summer and went with the free HMO medical plan for the rest of the year. I may opt for the HSA plan next year but it really chaps my hide that there is that $2,000 minimum in addition to the annual fee.

    • jlcollinsnh says

      Yeah, it sucks that some companies take cool opportunities like HSAs and muck ’em up with unnecessary restrictions.

      Also, as I said to Sundeep above….

      According to IRS publication 969, you can also establish the HSA through a trustee that is different from your health plan provider.

      Unfortunately, Vanguard does not yet offer direct HSAs.

  12. Big Guy Money says

    Hey Jim,

    Two quick things –

    Great job pointing out the difference between the HSA and FSA. In day to day conversation, it seems like there’s a lot of confusion between the two. I’ve had both, and love our current HSA while our experience with the FSA wasn’t great (although it’s good to see it doesn’t have to be a ‘use it or lose it’).

    My second thought is more of a question.. Since we’re still using our HSA for medical expenses (not ‘hacking’ it), we haven’t yet invested within the account. I was curious though, so I’ve reviewed the funds and it appeared the only fund below 1% ER I believe was the Vanguard Total World Fund. As we’ve discussed, I shoot for an 80/20 stock/bond split.

    I’m not sure why I approach this account any differently from any other account (maybe because the account is for medical expenses), but for some reason I feel hesitant to just throw it in the Total World Stock Index fund and adjust the rest of my allocation?

    I feel like I rambled a little, but I hope my question makes sense. For the immediate future we plan on using the funds to pay for our medical expenses, so if I invest a portion I feel like it should be just as conservative if not more so.

    • jlcollinsnh says

      Welcome back, Big Guy!

      Yeah, when I first came across HSAs I found them easy to confuse with FSAs so it seemed an important point to make.

      As for you question, I like the Total World Fund and that’s what I’d chose in your position. Then, if needed, I’d adjust my allocation elsewhere looking at all my assets as a whole. Make sense?

  13. Brent says

    I think depending on the HSA rules to stay as-is to the point where people can treat it like an IRA by the time they hit 65 years old in 15, 20, 30 years is a very risky proposition. Not to go all tin-foil hat on you, but I just think the gov’t will close that loophole eventually.

    I could be wrong, granted, but the truth is nobody can tell you what tax law will be like relative to these tax-advantaged accounts in 30 years (I’m 34).

    • jlcollinsnh says

      Good point, Brent.

      But this is a risk we take with all these tax-advantaged accounts and, indeed, with all our wealth. All we can do is work with the law as it exists.

      No one can tell what will happen with tax law, but the good news is congress is always reluctant to take things away from voters. Pisses the voters off and costs the pols their precious seat at the trough.

      My guess is that should they close this loophole, it will be for contributions going forward from that point. Those already in will very likely be grandfathered.

    • Scott says

      The “use it like an IRA after age 65” part is not a loophole, or rather, it was included intentionally to make the funds usable even if you don’t have medical expenses. Feels like the result of bipartisan negotiations.

  14. clubgitmo says

    I fully fund my HSA every year and it is invested in the Vanguard Wellington fund. All medical issues are out of pocket expenses.

  15. Lynne says

    I think people may be focusing/worrying too much about the IRA aspect of the HSA. They seem to be assuming they won’t have healthcare expenses in retirement that will empty their HSA over a few decades of retirement without any taxes owed.

    Most people I know over 65 do spend more on medical care as they get older, and the trend is toward consumers bearing more and more of their healthcare costs. So I expect to be liable for a growing share of my healthcare expenses in the years ahead.

    And for the rare person in perfect health after 65, you can use your HSA to pay for Medicare premiums, and long term care insurance premiums.

    On a happier note, there’s also a trend toward preventive care to help people be healthier. So by the time people who are decades from retirement do retire, they might be able to pay for things like massages and gym memberships from HSA funds. Who knows, maybe even a yoga retreat in Costa Rica…..

  16. EricH says

    Thanks for this article Jim, and for the entire Stock Series.

    I’m currently not investing, as I’m paying off CC debt. I buy my insurance on the open market (I didn’t qualify for the ACA subsidy). My employer doesn’t offer insurance or 401k plans. I have almost no yearly medical bills (fingers crossed).

    After my CC debt is paid, I’m going to start investing. Would you suggest an HSA as my first investment vehicle, or should I skip that and go with an IRA and keep my current health insurance? I like the idea of the HSA being multi-purpose. And I also like that I could pay for dental expenses tax free.

    Thanks, e

    • jlcollinsnh says

      Welcome Eric…

      glad you like it.

      If you currently have a high deductible health insurance plan, which you need in order to open and HSA, and will be keeping it going forward the yes an HSA is what I would fund first. It has the advantages of an IRA, plus the ablity to pay for medical expenses with tax-free dollars.

      While you don’t have a 401k, if you did funding it up to the point of fully capturing any employer match would come first.

  17. Eli Inkrot says

    Nice review. As mentioned, the Mad Fientist did a great review on hacking your HSA previously. It’s always good to have a reminder. These kinds of advantages are great for everyone, but I believe especially useful to keep in mind when thinking about self employment. For an individual, with the standard deduction, personal exemption, IRA, SEP, HSA and healthcare you could easily pay $0 in federal taxes on your first $25k made or so.

  18. TravisT says

    I’m not sure if the madfi mentioned this other extra hack or not, use a rewards card to pay your medical expenses instead of you using your hsa funds. Our son had surgery earlier this year that blew out our deductible. Rather than using our hsa funds, we paid with a new chase card that paid us $500 cash backWe saved 10% off the surgery while creating a clean paper trail for documenting our medical expenses for future reimbursements.

    • jlcollinsnh says

      Welcome Travis…

      I don’t think he did, or at least I don’t recall it. So thanks!

      Cool idea, but I hope you paid off the card in full when due? High credit card debt/interest is a killer!

      Most importantly, I hope your son is fully recovered and completely healed…

  19. Emu says

    Two questions for Jim & the gang:

    – What happens to an existing employer-sponsored HSA if the employee switches away from a high-deductible plan or leaves the company? Does it live on in perpetuity much like a 401k from an old employer?

    – My wife and I incurred a large amount of out-of-pocket (elective) medical costs this year. Today we have very little in my wife’s HSA, and I’m not eligible to open one until January. Equipped with our 2014 medical receipts, are you saying we could feed and grow our HSAs and pay ourselves back at any time by withdrawing from the HSA?

    This is a huge benefit that we had not considered! My favorite blog posts are those that save me thousands of dollars!

    • jlcollinsnh says

      Hi Emu…

      1. Yep. You fund an HSA with your dollars and it belongs to you. It follows you and lives on until you spend it.

      2. Yes. You can pay your medical expenses out of pocket and leave your HSA to grow. Then at any future time of your choosing you can withdraw the money to reimburse yourself. Just be sure to save your receipts for documentation.

      • Cody says

        One of the problems I ran into after I left my employer is that the HSA company started charging me $5 or $10/month since I was below some minimum and yet I couldn’t add to it and didn’t have enough to get it invest. I was watching it just run dry from their fees over the following two years. Eventually I decided to just use it up on the very few medical expenses we had. Now I just wish there was a cheap and easy way for self-employed to get into an HSA. The plans are too expensive compared to a health share coop to offset the tax benefits. IMHO

  20. Daniel says

    I graphed out the premium + out of pocket costs for my employers health plans per dollar of medical expenses my first week on the job. The HSA was a no-brainer being the cheaper option through 90% of the range in medical expenses. The “premium” plan (must be named that because of the high premiums) was robbery. The standard plan beat the HSA in just a narrow band of medical expenses. I compared the single, +spouse, and family plans and the relationship held true for all. I can’t imagine why anyone in my company is in anything other than the HSA. This is before considering the tax savings up front or the potential future benefits.

    Long story short, I love HSA’s and encourage everyone to do a real comparison with their options, since the benefit of an HSA over other plans can vary. I have maxed out my HSA for three years and have had $120 in medical expenses over that time. I feel like I hit the good health lottery with all the premium expense I have saved.

  21. Baha says

    Great blog, fantastic information. Very thankful for its content. I didn’t notice any recommendations on HSA providers? It seems there are a number of choices with varying investment options and costs. Any clear winners (which include our favorite Vanguard funds) at a reasonable price that most are using? Thanks again!!

      • Jared I. says

        Looks like that link is broken. Here’s an updated link to Health Savings’s available Vanguard Funds

        They do offer VTSAX. Keep in mind that, while still a fantastic investment, they will hit you with a few *tiny* fees: an Administrative Fee of $45 per year for the account. And on top of this a Custodial Fee of 6.25 basis points quarterly. (I’ve never heard of basis points. This ends up being a fee of 0.0625% deducted quarterly.) Together these fees, over the course of a lifetime, are completely negligible. In addition, my gut tells me these fees are more than offset by being able to purchase Admiral shares with less than $10,000 to invest.

        My employer offers a HDHP, but does not sponsor an HSA. While it would be nice if they contributed to the HSA (hard to turn down free money), the fact that I have total control over where my HSA is invested makes up for it! 🙂

        • Jonathan says

          You’re off by a factor of 100 on your custodial fee. A basis point is .01% (i.e. 1% of 1%), so 6.25 basis points = 0.0625%.

          • Jared I. says

            You are correct, Jonathan. Unfortunately I am unable to edit the comment anymore. Jim can you make that correction?

            The point still stands that Health Savings Administrators is an excellent choice for an HSA.

  22. Galina says

    Forgive me if this has been asked already…

    Do you know if the requirement for participation in HDHP is for the year the funds are contributed/used/kept?

    I fund my own HSA “on a side” from my company. Currently my health plan is HDHP, but what if next year I get another job and pick a good not-HDHP? What happens to my HSA effect on taxes? Can I continue to contribute tax-free? Can I use the funds tax-free for medical expenses? What if i don’t do either and just keep what I have? How does it work then? Do you know?

  23. Galina says

    Ah, another question. I just followed that link for Health Savings Administrators, because i want to switch to them. My current HSA company doesn’t give options for investing and I am earning less than 0.01% there 🙁
    So I went there and read that I can’t open an account if I am covered by my husband’s health plan….. I am probably reading this wrong, so please help me understand.

    Can we or can we not have an HSA account?

    When my current HSA account was opened it was opened by my employer. I was single and I had HDHP thru my employer.
    After I left my employer I kept the HSA account but didn’t contribute to it for few years.

    Skipping forward, I got married, had a baby, used most of the money in the HSA and found a new job and last year decided that we were gonna contribute to it again. Since I had the account already I didn’t open a new one, I simply started to contribute to my existing one. We did this for a year and during this whole year my entire family was covered by HDHP under MY name (and HSA account is also under MY name).

    Starting this year (just a month ago) we switched and now my entire family including me is covered by HDHP under my HUSBAND’s name…. This is the only plan I am covered by, but it’s not under my name…… So can we contribute to HSA account under my name tax-free?

    Or what should I do to make this move from my current HSA company to a new one? Can I do a rollover to like “family” plan under both names for my husband and I or what?

    I am confused….

    Thank you

    • jlcollinsnh says

      Hi Galina…

      Wow. You have a unique, complex situation and I’m afraid my level of expertise in HSAs falls short in providing answers I’d feel totally confident in offering you.

      I wish I could help, but I’d rather say nothing than risk misleading you.

      Perhaps one of the other readers here might be able to offer some help.

      You might also check out:

      Give that a read and perhaps post your questions there. He’s a great guy and he’ll help if he can.

      Good luck!

    • Jeremy says

      Jim pinged me to see if I knew the answer to your question, and I don’t

      I would recommend talking to the plan administrator at your husband’s employer

      I assume that in the same way an IRA is in an individual’s name, the HSA is as well, so you will now need to contribute to your husband’s HSA. Best to do this with payroll deductions to save the FICA taxes

      You could rollover your own HSA to another administrator with better investment options, I just don’t think you can merge the accounts

      After talking with the plan admin, please let us know what they say. It is an interesting situation


      • Galina says

        Thank you Jeremy,

        Unfortunately we don’t have an option for an employer-sponsored HSA account. Neither of our employers offer that. That’s why I don’t want to have 2 accoutns. I don’t want to pay fees 2 times.
        Also I anticipate us switching back and fourth for medical plan to be under my name of my husbands.
        In any case. Thank you for your reply. I will call new HSA company I want t oswitch to and clarify details, but I’ve got a feeling there should be no problems with what we want to do.
        Thanks again 🙂

  24. Steve F says

    Hey Jim — Great site. I’ve been reading through the old posts and came across this one. Perhaps I can add to the discussion.

    As mentioned, you don’t have to contribute to your employer’s HSA; however, you do get the benefit of reducing your SS and Medicare taxes if you do (SS only if you are below the max). What if you don’t like your employer’s plan? Open up another HSA account and rollover the balance (limited to once per year). It doesn’t satisfy your KISS mantra, but it is another option.

    My employer’s options aren’t great so I opened up an account at ELFCU (now Elements). Once a year I roll over the balance and invest in some low cost ETFs. I’ve decided to keep a minimum balance in my employer’s plan + plus the non-investment side of the ELFCU plan to avoid the account maintenance fees, but that’s optional.

    The Finance Buff has two good articles on this.

    Best HSA provider:

    How to Rollover an HSA:

    Keep up the good work.

    • jlcollinsnh says

      Welcome Steve…

      and thanks for the kind words.

      Thanks, too, your input. Sounds like a fine strategy!

  25. Jonathan Tomer says

    I’ve been using an HSA for five or six years now and love it, but I’ve personally never felt the deferred-reimbursement hack is worth it. Sure, you can glean a lot of tax benefit by saving a receipt for ten or fifteen years… but you’re adding a brand-new kind of risk to your investment portfolio. Call it “receipt loss risk.” If the hospital bill for that $15,000 surgery goes missing before the time you want to make your withdrawal, you’re out of luck, and now instead of saving 15 years’ worth of taxes on investment, you’ve *lost* the taxes on your principal (and 15 years’ worth of growth on those). And you can lose receipts in a lot of ways: the risk I personally worry most about is disorganization (a risk which varies a lot from person to person), but you can also lose receipts in natural disasters or if the movers miss a box when you move or lots of other ways. Sure that can be a problem any year at tax time, but usually you only have ONE year’s worth of receipts at risk at any given moment.

    • Diane C says

      Or more likely, the ink will fade until it becomes unreadable. The solution is to go digital. Take pictures and store in multiple places/formats. Include access information in your financial planning documentation.

  26. Mike says

    I understand VTSAX and VTI both hold the same companies, and the latter can be bought and sold as a standard stock. I have a trading account on TradeKing which charges $4.95 each transaction. Are there any other hidden fees/costs typically associated with owning VTI that I’m missing? Would it be a mistake to take the ETF route?


    • Jonathan Tomer says

      Mike: the other “hidden” cost to ETFs is pretty subtle: it’s the fact that since you actually buy and sell ETFs on the secondary market (as opposed to mutual fund shares, which are directly created and destroyed by the fund as you buy and sell them and are priced at exactly their net asset value per share), you have a “bid/ask spread” like with any other stock. That is, if you were to buy and sell one share of VTI at the same time, you’d get a little less for the share you sold than you paid for the share you bought. On the other hand the expense ratio is equal to the VTSAX Admiral shares (and therefore lower than the VTSMX investor-class shares) but the minimum amount to purchase is only one share ($110 at today’s prices, instead of $10,000).

      One hidden benefit to ETFs — which is even more subtle than the pricing issues, and which actually doesn’t really apply to VTI in practice — is a slight tax efficiency boost. ETFs can take advantage of their two-tier structure (market makers create and redeem shares in exchange for the underlying assets, then sell/buy those shares to/from you) to essentially eliminate “capital gains distributions” (those pesky annual payouts that a fund is required to make when it sells its underlying assets at a profit as part of share redemption or asset rebalancing). However, VTSAX very rarely has capital gains distributions anyway, because of its very low portfolio turnover and careful capital loss harvesting on the part of the fund advisors.

      If I were you and had at least $10k to spend, I’d definitely ditch TradeKing and buy VTSAX direct from Vanguard; if nothing else, it’s simpler. But if you don’t want an extra account or can’t buy into Admiral right now, and you plan to pursue a buy-and-hold strategy (thereby mitigating the effect of those $5-per-transaction fees), the ETF will serve you just fine.

  27. TS says

    Just found your site yesterday and am devouring it. Last week I started a new job after several years out of the job market and am going to be playing a serious game of catch up with my retirement situation. I want to be as proactive as possible, which is why I’m diving in with both feet. That said, I was talking to my mom today about whether to go with my employer’s PPO or high ded-HSA account plan. She had an HSA a few years ago and said in her experience the tax filing hassles were not worth the benefits. Mainly, apparently the HSA did not mail out the required forms for filing until JUNE when your taxes are due in April, but apparently dealing with it on your taxes is a mess too. I can see the tax advantages of the account, but it sounds like a red-tape nightmare when it comes to tax filing time. Can anyone else chime in here on their experience with filing taxes on an HSA? I have four weeks from now to decide. The actual costs of the plans are comparable, so the only real advantage I can see would be the tax advantages provided they are not outweighed by the paperwork.

  28. Chris says

    Thanks Jim,

    I looked through the comments and couldn’t find anything relating to my current situation. I also checked out the two articles on the Mad FIentist website too. My situation is kind of unique.

    I’m looking to utilize the HSA for early retirement, but unsure of the tax advantages and how to set one up through an S-Corp. The business is my families only source of income. I am 99% shareholder while my wife holds 1%. We run myself through W-2 and have zero employees.

    From my understanding, we can set up our healthcare under our personal names (Need over 2 EE in CA to run through business). The HSA can be set up through the S-Corp. We make payments toward the HSA from the business. This allows us to avoid employee/employer FICA taxes (15.3%) and employer FUTA tax. I believe we are still taxed on ordinary income portion for the employee W-2.

    Now comes the fun stuff…

    Which option is more advantageous for early retirement and taxes?

    1. Contribute $3,500 per year to the HSA and pay $400 per month out of pocket. Annual cost of family plan is $4,800 with $3,500 deductible. (Avoid EE/ER FICA and ER FUTA…pay taxes on ordinary income on W-2)

    2. Have a no deductible family plan and no HSA. Cost is $9,600 annually. Pay for this using company and take shareholder deduction of 100%. (Pass through for taxes – No taxes on ordinary income)

    3. Have a $1,000 deductible and no HSA. Cost is $7,000 annually. Pay for this using company and take shareholder deduction of 100%. (Pass through for taxes). Contribute left over $2,600 to owner only 401k.

    I appreciate any feedback. Hopefully, this is not too confusing. May be appropriate to have an ice cold beer while you read this 🙂



    • jlcollinsnh says

      Hi Chris…

      MF is far more knowledgeable on HSAs than I and, seeing as you posted this on his site as well, I’ll leave it to him to respond.

      Besides, he drinks more beer than I do. 😉

  29. E Neal says

    Another, less discussed aspect of an HSA is that they typically allow you to purchase things like Advil, Band-Aids, First-Aid, Menstrual Items, etc. with essentially Tax Free money. While I can see that the strategy laid out above would lead to greater wealth at retirement, it’s cool to me to get a discount on some household essentials.

  30. wishicouldsurf says

    Just finishing up with your stock series and when you started discussing the high fees with employer sponsored 401K plans, I began digging into that as well as the fees related to my employer sponsored HSA plan. My HSA plan has a bunch of fees and to access any low cost index-y/Vanguard fund type of investments, there are additional costs. So while I love the theory and the tax advantages, in practice, I’m not sure how much I love them as a long term play while I am still working due to all the costs involved. It’s like the companies sponsoring these plans deliberately design them to make it difficult for savvy/value investors. After diving into it and reading your stuff on the 401K plans and the Mad Fientist analysis and since the stock market has had a bit of a run-up (I know timing the market is foolish), I’ve decided to liquidate and get reimbursed for a pile of expenses over the past 4-5 years. I have a large tax liability this year and instead of taking money out of my taxable accounts to pay for this, I used my HSA and the appreciation to get reimbursed for all sorts of expenses which my health care plan tracks online so the process wasn’t administratively onerous. Not sure it was the best choice but intuitively it felt right. I’m on track for ER in about 15 months just for a frame of reference and will continue to use a HSA down the road but will look for ones with lower costs.

    • jlcollinsnh says

      I’m not sure it was the best choice either. These things can be so complex it is hard to tell.

      But the important thing is you are looking at your options with a critical eye.

      And I wish I could surf too. 😉

      • wishicouldsurf says

        I had a really good year at work and made a lot of interest income from various investments so it felt better to use pre-tax money and non-taxable capital gains to pay the tax bill, which was very expected. The math showed I was giving up a lot of fees and I estimated about 20% of gains to fees every year. Choosing a lower cost vanguard mutual fund with the associated extra fees they charged me to access these “non-sponsored” plans was a wash with the additional costs associated with choosing their sponsored, high cost, BS mutual funds, none of which was a true index fund. When I can choose my own HSA and base those choices on actual costs, investment choices and convenience, I agree that it is a good long term play but even before I got to this post, your post about the 401K plans and associated ridiculous costs made me look at my own 401K plan costs, which are excessive in my case, and my HSA. 20% of the gains is a significant amount to give up over time. Part of my planning though also involved front end loading my contribution – I put the entire HSA contribution for the year in January, invested it, and then pulled it out the Friday before last once I decided the method I was going to use to pay my taxes (I didn’t want to dip into my FU cash fund for it). And cheers to surfing, I will be doing more of it hopefully when I retire! And hoping to go to Ecuador one of these years. It’s been fun reading and learning and making the path I was on very concrete over the past 6 months. I was always on this path, I just hadn’t realized what the end game was yet.

  31. DaveM says

    Great post Jim!

    I have an HSA from my old employer, and switched jobs in Feb this year. For reasons I won’t go into, I opted for a HMO plan with the new employer at least until next open enrollment and I may switch back to a High-Deductible/HSA plan.

    My existing HSA is still with the old provider and they are now taking a $3.95/month admin fee which I was guess was being absorbed by my old employer before. The majority of the money is invested in VSCGX with a small amount of cash left separate.

    Based on the balance of the account, the admin fee I’m paying works out to around .55% (half a percent) basically for the year.

    I’m wondering about moving the HSA to another provider, but all of them I’ve looked at charge fees at least that high or higher. Does Vanguard offer an HSA account directly, or do I have to go through one of the HSA providers?

    I just don’t know if it makes sense to move it now, or wait until I eventually sign up for a new plan with my current plan, and hopefully then roll my old HSA into the new one.

    Looking for suggestions on what others have done in this situation. Thanks!

  32. Sarita says

    The HSA fog in my brain is starting to clear, thank you so much for your post.

    I have not participated in my employer’s HSA because I have been working overseas and there is no tax advantage. Upon return to the US in August I expect to be laid off. This might be just the impetus to trigger retirement – the jury is still out! I’m 57.

    In the event I retire or cannot find a job, I will go on Cobra for 3 months and then switch to a high-deductible plan via the ACA. My only income will be rental and interest/dividends from my taxable investments held at Vanguard. My taxable account will supplement any spending needs beyond that.

    2 questions:
    -Is it worth setting up an HSA when earned income is low?
    -Can I use HSA money to reimburse myself for medical expenses incurred outside the US?

    Thanks, again.

  33. Nate says

    Wife and I are looking to invest HSA money. We have the following Vanguard options –>
    Vanguard Dividend Appreciation Index Investor VDAIX
    Vanguard Small Cap Index Admiral Class VSMAX
    Vanguard Developed Markets Index Admiral VTMGX
    Vanguard Emerging Markets Stock Index Admiral VEMAX
    Vanguard Long-Term Bond Index Investor VBLTX
    Vanguard LifeStrategy Conservative Growth Investor VSCGX
    Vanguard LifeStrategy Moderate Growth Investor VSMGX

    Any help would be appreciated. I was hoping to see the easy option of VTSAX…


  34. Kris says

    I’d have to run the numbers, but in the past I’ve been in the 15% tax bracket and thus used a ROTH, which I realize the MadFIenist is not a fan of, because I liked the idea of taking out everything (dividends and capital gains included) tax-free later. I wonder if maxing out Trad IRAs or the HSA (which has extra fees to it) would be better EVEN is one was in a lower tax bracket.

    • jlcollinsnh says

      Hi Kris…

      I think there are two things to consider.

      First, every dollar you pay in taxes in not only gone forever, but so is all the money it could have earned over time. So, to put say $5000 in your Roth, you need to pay $750. Gone.

      Second, it matters how young you are and how many years there are until you withdraw this money. There is a big difference in lost earnings on it if you are looking at decades ahead or a few years.

      Personally, unless there is very little time left, I’d rather go with the T-IRA, keep the $750 and let it earn for me over time.

  35. kathryn carreon says

    Useful post ! I Appreciate the analysis – Does anyone know where I might access a sample UB-04 Claim Form and Instructions form to fill in ?

  36. Kris says

    I’ve had an HSA with HSA Bank “forever” and am really tired of all the fees (5.5% unless I keep $5000 as basically cash) and lack of great investing options. When one is in a very low tax bracket and not planning on pulling the money until their 70’s or so, I’m tempted to avoid the fees and go for a Solo 401(k) (or Individual 401(k)) through Vanguard. Thoughts?

    • jlcollinsnh says

      Hi Kris…

      It is stunning how investment firms can destroy a good thing.

      Perhaps you can also consider moving your HSA to a more reasonable place?

  37. C-FI B-FI says

    I have questions regarding investment direction. In my company sponsored 401k I am currently invested in the following:

    50% US Large CAP Equity Index Fund with a 0.02% ER
    25% US SMID Equity Index Fund with a 0.05% ER
    25% US Bond Index Fund with a 0.04% ER

    I can send my contribution to a self directed brokerage account within my 401k plan and then buy ETF VTI from Vanguard with ER of 0.05% there are zero fees to do this.

    I also have a significant amount sitting in a Target Date Fund with a 0.36 ER.

    My plan only charges me a one time $4.95 fee to sell/buy if I wanted to sell the Target Date fund and buy the ETF VTI.

    My questions are:
    1. Should I change my future investment direction to the self directed and invest in VTI?
    2. Should I sell the Target Date Fund and purchase VTI?

    I am 54 and plan to retire in 5 years.

    Thanks for all your FI help, your website has been a never ending knowledge fountain!!

  38. kindoflost says

    I missed the boat on the HSA when I was working: I contributed but never maxed it out. 2016 was my first year with no earned income so I maxed out my HSA because it was the only way to reduce my taxable income since I won’t itemize (unless I am issing tomething?). I hear the new president might rise the limits and decouple it from a HDHP, that would be great. The only little drawback is that to use it as an IRA you have to wait an extra 5.5 years. Assuming you are lucky enough to never need it for health purposes 😉

  39. Mary Kay says

    I haven’t used the HSA option because the HMO is so inexpensive for me and I don’t want the risk of a HD plan right now with young kids. I did notice, in doing my taxes this year, that HSA contributions are not tax deductible in CA. They are still tax deductible at the federal level. Just an FYI. I love the stock series!

  40. Julie @ The Family CEO says

    I am thrilled, thrilled, THRILLED to have discovered your blog via Paula at Afford Anything. My husband and I are doing exactly what you describe here with our HSA…fully funding it but using it as an investment vehicle barring any unforeseen medical situations, which certainly could occur. Either way, it’s nice to know it’s there. Up until now (three years worth of funding) we’ve kept it in cash, but I’m now looking into investing it. Not sure how aggressive we want to get since we’re 52 and 54 and also could potentially need it for medical expenses.

  41. Neil says

    Question re: HSA Maximum Out-of-Pocket Expense Limit
    I was super excited after reading about HSAs as an investment tool only to find out that I do not qualify. I was certain I would qualify because I always get the lowest-premium health insurance plan, i.e., highest deductible plan, possible, usually the “Bronze plan.” For example, in 2018 my deductible is $5,500, which is well above the IRS minimum deductible of $1,350. BUT my maximum out-of-pocket (“OOP”) expenses is $7,350, which puts me over the maximum limit of $6,650 set by the IRS! Therefore, I do not qualify for an HSA, although it, apparently, is made for those who have high deductibles. (What is the point of this out-of-pocket max?)

    My main question is to ask whether anyone chooses health insurance plans, with a focus on making sure they meet the HSA limits for deductible and OOP expenses? My premium payment now is $402. I would have had to choose a “Silver” plan, with a premium of $510 to get a plan that met both the minimum deductible ($2,750) AND maximum OOP expenses limit ($5,000). That means, to take advantage of the HSA, I would have had to shell out almost $1,300 more per year in premium payments. I’m thinking that it would have been worth the extra $1,300 in extra premium payments to become HSA eligible, allowing my to contribute $3,450 into an HSA account, and then invest in VTSAX. Any ideas or comments? Thanks!

  42. Sam says

    Quick question – I withdrew some money from my HSA in 2018 before I was enlightened by your blog. I know that we are still allowed to max out the HSA for 2018 but do you know if it is possible to do a “recontribution” to my 2018 HSA to ensure that I am fully maxed out? In other words, can I replace the amount I withdrew?

    Thanks for all your great posts!

  43. Shawn Thompson says

    Hi Jim

    I love this stock series and you and the max fientist have made such an impact on how I view money and wealth.

    I am enrolled in an HSA with Health Equity and they have an investment option for my account. They offer some Vangaurd funds but not VSTAX. Any recommendations on which fund to invest my money?

    Thank you

  44. JC Webber III says

    Don’t know if anyone mentioned it yet or not, but you can also use the funds in your HSA account to pay for your Medicare premiums once you are on Medicare.

  45. Joel says


    I have been reading your stock series. We have an HSA right now but the payroll deduction goes to a bank account. Is it worth it to open our own and just pay the FICA tax losing 7.65% out of the gate?


  46. Johnny says

    Hi, I was reading JL’s book and he talks about moving your HSA to Vanguard (unless I misunderstood). My current HSA is with a company called Benefits Wallet. I called Vanguard today and Vanguard say I can’t move a HSA to them. Any help or suggestions on how I can get my HSA into an investment fund to grow instead of just sitting in my Benefits Wallet account? Thanks Much

  47. TotalLolman says

    Hi Jim,

    Just found your stock series. Thank you so much for all the fantastic information.

    There are a couple “gotchas” with health savings accounts.
    1. There may be account maintenance fees paid to the HSA adminstrators
    2. Your HSA adminstrator might require you to keep a certain threshold of your HSA in cash.
    3. You might not have access to many low cost index fund investment options in your HSA.

    For example I have an HSA through Optum with my employer. Let me tell you, Optum is terrible. There is a 2K cash threshold before you can invest, and $3 per month maintenance fee. There is only one good investment option, an S&P 500 fund through vanguard.

    I plan to roll this over to a new HSA provider next time I do a 401K rollover. There is a website called that shows some better options. Looks like there is no Vanguard option just yet but the Fidelity option looks pretty good.

    • TotalLolman says

      Also, the HSA Reportcard uses the term “shoeboxer” to refer to HSA owners who save up their expenses to be reimbursed many years in the future. I’m definitely going to try shoeboxing but like everyone else I have some concerns.

      Concern 1: IRS changes the rules to disallow shoeboxing. Nothing I can do about this but I feel comfortable planning for some big medical expenses in retirement anyway.

      Concern 2: Inflation eats away at the receipts I have kept over the years. For example I paid $100 dollars for glasses this year. By the time 2050 comes along that will only be the equivalent of $50 I can withdraw. With the new law that over the counter medication can be reimbursed with an HSA it doesn’t seem worth it to keep track of $5 Tylenol receipts.

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