How to Open an HSA: The Triple Tax Advantage Account

A Health Savings Account (HSA) is the only account with triple tax advantages: tax-deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses. If you're eligible, max it out before your Roth IRA.

The Triple Tax Advantage

No other account offers this combination:

1. Tax-deductible contributions: Reduce your taxable income today
2. Tax-free growth: Investments compound without annual taxes
3. Tax-free withdrawals: For qualified medical expenses, no taxes ever

Compare to a Roth IRA (tax-free growth and withdrawals, but no deduction) or Traditional IRA (deduction and tax-deferred growth, but taxed on withdrawal). HSAs win on all three.

Eligibility Requirements

What Is an HDHP? (2024 Numbers)

• Minimum deductible: $1,600 (self-only) / $3,200 (family)
• Maximum out-of-pocket: $8,050 (self-only) / $16,100 (family)

Check your health insurance plan documents or ask HR if your plan qualifies as an HDHP.

Contribution Limits (2024)

• Self-only coverage: $4,150
• Family coverage: $8,300
• Catch-up (age 55+): Additional $1,000

If your employer contributes to your HSA, that counts toward the limit. So if they put in $1,000 and you have family coverage, you can contribute up to $7,300.

The Optimal HSA Strategy

Here's how to maximize your HSA's power:

1. Max Out Contributions

Contribute the full annual limit. The tax savings alone make it worthwhile.

2. Invest the Balance

Don't let it sit in cash. Invest in low-cost index funds just like your IRA. Many HSA providers offer investment options once you reach a minimum cash balance (often $1,000-2,000).

3. Pay Medical Bills Out of Pocket

Here's the advanced move: pay current medical expenses from your regular checking account, not your HSA. Keep receipts. Your HSA continues growing tax-free.

4. Reimburse Yourself Later

There's no time limit on reimbursement. You can pay a medical bill today, let your HSA grow for 20 years, then reimburse yourself tax-free. Those decades of tax-free growth are valuable.

Qualified Medical Expenses

HSA funds can be used tax-free for a wide range of expenses:

• Doctor visits and hospital care
• Prescription medications
• Dental and vision care
• Mental health services
• Medical equipment
• Some over-the-counter medications (as of 2020)
• Menstrual products

Not qualified: Cosmetic procedures, gym memberships, most supplements, health insurance premiums (with some exceptions).

HSA as a Retirement Account

After age 65, HSAs become even more flexible:

• Medical expenses: Still tax-free
• Non-medical withdrawals: Taxed as ordinary income (like a Traditional IRA), but no penalty

This makes your HSA a backup retirement account. Use it for medical expenses tax-free, or for anything else with just ordinary income tax.

Step-by-Step: Opening an HSA

1. Verify eligibility. Confirm you have an HDHP and meet other requirements.
2. Check employer options first. Many employers offer HSAs with payroll deduction (saves FICA taxes too!).
3. Or open independently. Fidelity offers a standout HSA with no fees and full investment options.
4. Set up contributions. Via payroll deduction or automatic transfers.
5. Choose investments. Once you hit the minimum cash threshold, invest the rest.
6. Save receipts. Track all medical expenses for potential future reimbursement.

Best HSA Providers

If your employer doesn't offer an HSA or their provider has high fees:

• Fidelity: No fees, no minimums, full investment lineup—widely considered the best
• Lively: Good investment options through TD Ameritrade
• HSA Bank: Common employer option, decent but check fees

Pro tip: You can have your employer contribute to their HSA, then transfer annually to Fidelity for better investment options.

HSA vs FSA

Don't confuse HSAs with Flexible Spending Accounts (FSAs):

• HSA: Your money, rolls over forever, portable, investable
• FSA: Use-it-or-lose-it, employer-owned, not investable

HSAs are far superior for long-term wealth building.

For Frum Families: Considerations

Large families often mean higher medical expenses. An HSA can help:

• Family contribution limit ($8,300) helps cover larger household medical costs
• Childbirth and pediatric care are qualified expenses
• Can pay for each family member's medical needs

Planning note: If you expect significant medical expenses soon (pregnancy, planned procedure), you might use HSA funds currently rather than letting them grow. Balance tax-free growth against cash flow needs.

Common Mistakes

• Not investing. Leaving HSA funds in cash misses the growth opportunity.
• Using HSA for every medical expense. Consider paying out-of-pocket to maximize tax-free growth.
• Losing receipts. Keep documentation for future reimbursements.
• Contributing when ineligible. If you lose HDHP coverage mid-year, stop contributions.
• Ignoring employer contributions. Free money—make sure you're getting the full match or contribution.

Priority Order

Where does the HSA fit in your investment priority?

1. 401(k) up to employer match
2. HSA (max it out)
3. Roth IRA
4. More 401(k)
5. Taxable brokerage

Yes, the HSA comes before the Roth IRA due to the triple tax advantage.

Next Steps

If you have access to an HDHP, an HSA should be a top priority. The triple tax advantage is too powerful to pass up.

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