Why Most People Are Wasting Their HSA (And How to Fix It)

In today’s episode, we’re tackling these topics:

• HSA eligibility rules, 2026 contribution limits, catch-up contributions, and the December “last-month rule”
• How High Deductible Health Plans qualify you to contribute
• Why leaving your HSA in cash limits long-term growth
• How to invest your HSA using brokerage options
• The “invest now, reimburse later” strategy to build tax-free retirement liquidity
• How HSAs can cover Medicare premiums, COBRA coverage, long-term care premiums, and other retirement healthcare costs

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The Hosts:

Kevin Kroskey, CFP®, MBA – About – Contact

Tyler Emrick, CFA®, CFP® – About – Contact

Episode Transcript:

Tyler Emrick:

Most people are using their HSA all wrong. They treat it like a medical spending account instead of leveraging its unique triple tax advantage. Today we’ll talk about how you should be using your HSA.

Walter Storholt:

Ready for another episode of True Wealth Design? Walter Storholt alongside Tyler Emrick, Certified Financial Planner, Chartered Financial Analyst, and one of the wealth advisors at True Wealth Design. And we’ve got a great episode today that I’m particularly interested in, Tyler, because we’re in year two of having an HSA, my family.

Tyler Emrick:

There you go.

Walter Storholt:

And we have not used it for any medical purpose yet despite having a baby last year. So maybe I’m using it the right way.

Tyler Emrick:

Tricky, tricky. Are you listening to a good planner? I don’t know. Yeah. No, no, that’s awesome. Well, these are my favorite accounts. I used to do retirement presentations at a lot of the local universities-

Walter Storholt:

Yeah.

Tyler Emrick:

… and retirement workshops, and stuff. Yeah, I would always get geeked up and jazzed out about HSA accounts, I don’t know why.

Walter Storholt:

You were born to be a financial advisor.

Tyler Emrick:

But yeah, I think they’re awesome.

Walter Storholt:

… if that’s the case.

Tyler Emrick:

Yeah, I guess, I guess. I’ll take that as a win. But yeah, no. HSAs are right and I feel like there’s some unique aspects on how to use them. So hey, today, let’s dive into HSA accounts and how families and individuals should be thinking about how they use theirs and if maybe they should be switched over to a healthcare plan that allows an HSA account. Because boy, they are wonderful and hopefully by the end of the podcast here today, you’ll be able to understand well, hey, is this even something that you want to consider or not.

Walter Storholt:

Yeah.

Tyler Emrick:

Yeah, health savings accounts.

Walter Storholt:

You break down a couple of interesting decision points though, right? There’s the, “Hey, do I get the health plan that gives me the option for an HSA,” first of all. And then once I have it, how do I use it? So it does seem like it’s a bit twofold here.

Tyler Emrick:

You got it, you got it. And let’s start with the basics. If you never heard of an HSA, or maybe I think it can get very confused with FSA. HSA, FSA.

Walter Storholt:

Yes. I don’t like the FSA. I’m sure it’s useful for some folks, but I did not like it when we had the FSA years ago because I just found myself at the end of the year going, “I’m going to lose this money,” so we’re just buying random things. You end up with 20 first aid trips.

Tyler Emrick:

Doing the Walgreens trips.

Walter Storholt:

Yeah, the Walgreens trips.

Tyler Emrick:

Yes, absolutely. No, you hit the nail on the head. FSA, flexible spending account. One of the downsides to them is generally use it or lose it. Now sometimes those plans can have a small amount that rolls over from year-to-year, but generally you have to use it.

Now, the tax benefit is very similar to an HSA. Anything you put in the flexible spending account, you get to deduct that on your taxes, which are a wonderful tax benefit, and then you get to pull it out tax-free. FSAs are generally going to be paired with different types of healthcare plans through your employer where maybe your deductibles are lower and those places don’t qualify for an HSA. Sometimes employers will pair it with an FSA and you could potentially use that there.

But there are some very unique circumstances where you can be on a high deductible healthcare plan, have access to an HSA and have access to an FSA. Those are not called general purpose FSAs, those are special purpose FSAs. So the distinction there would be, hey, your FSA that’s on a non-high deductible plan that has to be liquidated and used, and all that good stuff we just talked about, those can be used for just about anything medical-wise. Special purpose FSAs are very specific, they can only be used for very, very specific things like maybe dental or vision, or something like that. And it still allows you to maintain eligibility to contribute to an HSA account.

But yeah, HSAs are similar to flexible spending accounts with one key caveat is, well, you do not lose it at the end of the year. So HSA accounts, you contribute to them, you put money into them, you can use them for medical expenses, you have a debit card. Qualified, excuse me, medical expenses. You have traditionally a debit card tied to them that you can use. If you don’t use it, it just rolls over to the next year and can accumulate value, which is really where the magic happens, as we will get into, with these HSA accounts.

Now how you can maybe think about are you even eligible for an HSA account is well, hey, one, when you go through open enrollment through your employer is a wonderful time to say, “Hey, what plan options are afforded to us?” Generally, you’ll have one that is a traditional plan and one that is a high deductible, and generally the high deductible plans are paired with HSAs where maybe an employer’s putting some money in and then you have the ability to contribute to it as well.

If you are changing jobs or switching jobs throughout the year, maybe you are on an HSA eligible plan for part-year and maybe not for part of the year. Generally, you can do prorated contributions to an HSA account for the amount of months that you were eligible for an HSA or on a high deductible plan. There is this little quirky rule where it’s like the December rule, where essentially if you have a high deductible plan in December, on December 1, and and you’re eligible for an HSA, you’re actually eligible for a full-year contribution into the HSA. So that’s the only kind of quirky thing there. Outside of that, it’s just prorated basically each month that you’re on a plan, if you’re eligible for an HSA, that’s the amount of months that you can make the contribution for. So if you’re on it for nine months, nine-twelfths, hey, that’s how much of the contribution that you’re able to do it.

Walter Storholt:

That’d be common if you had a life-change event midyear and you went from a traditional plan-

Tyler Emrick:

You got it.

Walter Storholt:

… to a high deductible one.

Tyler Emrick:

Yeah.

Walter Storholt:

That helps clarify what you do in that year one.

Tyler Emrick:

Correct.

Walter Storholt:

Yeah.

Tyler Emrick:

Another big one is Medicare eligibility. So if you’re an individual that is working past age 65 and maybe you’re going to stay on your employer plan as your primary, and maybe you want to enroll in Medicare as a secondary, generally you would only want to enroll in Medicare Part A as a secondary because there’s no premium there. Well, if you do that, that can mess up your eligibility for contributing to an HSA because if you go on Medicare, you are no longer on a high deductible plan if you have Medicare Part A. So that would take away your eligibility to contribute to a high deductible plan.

So that’s one thing that you want to be mindful of, especially if you’re working past 65. Are you going to sign up for Medicare Part A or not? Do you have to or not? And how are you going to pair that with what you’re contributing to your HSA?

Likewise, which is this has come up a few times in the last month with a few of my families, where when you retire after 65 and you go on Medicare, they actually backdate your Medicare Part A coverage up to six months. So that would, if you end up working until you’re 70 or whatever, 70 and you’re contributing to an HSA, they’re going to make it like you were on Part A for six months prior so you’re not eligible for that HSA for those prior six months and that can mess people up a little bit on their contributions because that Part A coverage precludes you from being able to contribute to the HSA. So one little quirk to be mindful of there as you’re transitioning.

But yeah, the big thing is is, hey, are you on a high deductible plan? Traditionally, that’s defined as, hey, based off of your deductible amount and your out-of-pocket amount. So for a family, for example, generally your coverage, if your deductible is over 3400, you’re good and then your max out-of-pocket is under 17 grand, you’re good. Now, there are some other quirky things that could affect your eligibility there, but those are the two big ones to start out with. And then of course, talk to your employer and your HR coverage, they’ll be able to tell you from there.

But if you’re eligible for that plan, your contribution amount that you can put in there is dependent on whether you are on an individual plan or a family plan, and depending on your age. So I think the contribution limits for 2026 for an individual are around 4400. It jumps up to just under 9000, 8750 for a family. And then of course, if you are over 55, you can do $1000 catch up on top of those amounts.

Now, the big quirk is, hey, let’s say you’re married, your spouse covers you through healthcare so your spouse has the HSA through their employer. You and your spouse are both over 55 so you can do the catch-up contribution. Well, your catch-up contribution since the coverage is not through your employer actually has to go to your own personal HSA where you can actually go and open up your own HSA wherever you want, contribute the 1000 bucks outside of what’s tied to your spouse’s employer plan. So it’s a caveat there if you’re really looking to maximize these HSA plans as much as possible. Both you and your spouse are over 55, well, hey, you opening up a separate HSA would allow you to put in another 1000 buck for that catch up contribution.

Which as we’re thinking about, hey, these are my favorite accounts, very, very beneficial. Hey, every dollar that we can get into those HSAs are tremendous.

Walter Storholt:

Yeah. If you’re trying to pick one to add extra to, this might be one that you choose to do.

Tyler Emrick:

It really would be. And for those individuals that are like, “Well, I’ve always been on a traditional plan, how do I want to look and analyze versus going on a high deductible?” Obviously, you want to look at the coverage differences and how much you’re utilizing your coverage. Deductibles, max out-of-pockets, how much you used in the prior year, that type of thing. But the HSA benefit is going to be, hey, whatever you put in there, you’re going to deduct that off of your taxes. As long as you actually make that HSA contribution through your payroll services, you actually don’t even got to pay payroll taxes on it, which is another little added benefit. So you take your marginal tax rate, payroll taxes, and times that by whatever amount you put in the HSA and that’s what you’re starting with ahead for the year. And then maybe your employer gives you a 500 buck or $1000 contribution and that free money gets added on.

So you add up the tax benefit, you add up the free money from your employer and that’s what you … And then a lot of times, these high deductible plans, the premiums are lower because they’re a high deductible. So then you take your premium savings from going onto the high deductible plan. Those are the three big immediate benefits. And then you compare that to the traditional plan and say, “Hey, I got to have at least this much more of out-of-pocket. Am I going to get there, am I not?” And for a lot of times, that math does favor the high deductible plans for a lot of families.

But there is this other caveat, which we’re going to get to, which I think about, hey, the HSA is that stealth retirement account. Which is where I think maybe we think about how are we using our HSAs and where the benefits is and I think that’s where we want to talk through.

So that’s the HSA in a nutshell. That’s the initial analysis. Let’s say you get past that you you decide to go with the HSA. Well, a lot of times the way we see families using these accounts is, “Hey, you got a debit card.” To your point, “Hey, you have a baby, you have a kid,” whatever it is. You’re going to use that debit card until you hit your deductible or whatever, and that’s something that you don’t have to necessarily pay out of your checking and savings accounts. Thinks about it as, well, it’s not free money because it’s yours.

Walter Storholt:

Right.

Tyler Emrick:

But it’s a little bit easier to use.

Walter Storholt:

Yeah, it’s not coming out of the checking account at that point so it just feels a little bit different.

Tyler Emrick:

It feels a little different.

Walter Storholt:

It was very tempting when we got some of those hospital bills-

Tyler Emrick:

Yes.

Walter Storholt:

… near the end of the year to be like, “Instead of coming out of checking here in December, it’d be sure nice to-”

Tyler Emrick:

Yes.

Walter Storholt:

… “pull from that HSA account.”

Tyler Emrick:

Well, I go through it with my wife. My wife, she wears prescription glasses.

Walter Storholt:

Okay.

Tyler Emrick:

So she’s like, “Oh.” She’s like, “I’m going to use the HSA to cover my prescription glasses.” I was like, “No, we’ll just pay out-of-pocket.” And then she looks back and she goes, “I don’t know if I want them now.” Because it’s like, hey, it’s truly coming out of-

Walter Storholt:

Oh, interesting. Yeah.

Tyler Emrick:

… your pocket. We were actually just talking about that about a month ago.

Walter Storholt:

That’s funny.

Tyler Emrick:

But as you think about … And that gets down to the crux of, well, how do you want to use your health savings account?

Well, the HSA benefit is not only the tax deduction when it goes in, but any interest that you can earn or investment return that you can get in that account, it’s going to all grow completely tax-free, and you’ll be able to pull it out down the road without any more taxes paid in. That’s better than a Roth, that’s better than your 401K, your IRA, all that good stuff. Obviously, your 401K, you get free money match, all that. That’s important. But outside of that, you look at, well, the tax savings of these HSAs, well, there’s really nothing that can compete with it.

Walter Storholt:

Yeah.

Tyler Emrick:

So you also pair that with, hey, a lot of times, if you say you’re 10 years out to retirement and you’re probably earning as much as you ever have earned by working your cashflows good. You start thinking about, well, while you have that job and you have that income coming in, paying those medical expenses would probably hurt a lot less as opposed to having a big major medical expense once you’re retired, maybe you’re on individual healthcare, you’re on Medicare and you don’t have that income coming in and you’re actually just living off of the assets that you’ve accumulated, your savings, Social Security, pensions, that type of thing.

So when we thinking about using the HSAs, if we can wait to say, “Hey, let’s not use the HSA to reimburse us for our medical expenses. Let’s instead use it as an investment account and a retirement account.” Most every HSA will allow you to shift it over into what they call brokerage link or some other account within the HSA where you can actually invest just like you do in your 401K. They’ll give you a list of mutual funds to choose from, ETFs, or whatever the case is. You can treat it just like you do your retirement assets, invest it, continue to max out. And then over a long period of time, those earnings being tax-free, you can then use that HSA in retirement when you really are not working, you don’t have that stream of income coming in and it could be a wonderful way to bridge you to 65 where you maybe have a little bit higher healthcare costs before Medicare. Or of course, once you turn Medicare age, you could use it there, too.

So really get in that and changing that mindset to say, “Hey, why don’t I just treat my HSA like a retirement savings account, as opposed to that reimbursement account,” I think can add a tremendous amount of value. If anybody’s listening and you’re already retired, you don’t have access to an HSA because you’re on Medicare, hey, if you have any children, things like that. Really having that conversation with them saying, “Hey, are you using an HSA? Are you saving into it just as importantly as you are your 401K?” Because over the long term, the compounding benefit there is tremendous.

Now, there’s also, Walt, this little quirky rule with HSAs that says, “Hey, as long as your HSA account was open in the year that you had the expense you want to reimburse it for, you’re not required to pull that money out of the HSA in that year.” Meaning that I have some engineers who are keeping their receipts from medical bills that they have over the years and they would be allowed to reimburse themselves from the HSA at any point down the road for those bills. So if you have a big medical bill in 2026, it’s five grand, you pay it out-of-pocket, you keep that receipt. In 15 years, you can go into your HSA and say, “I want to reimburse myself for that 5000,” and it is an eligible expense to be able to pull it out without paying taxes or a penalty on it.

Walter Storholt:

Wow.

Tyler Emrick:

So if you’re that detailed, if you want to keep those receipts, that’s a way to do it. But I would argue too, even if you don’t want to go to that level of detail, hey, you’re going to have expenses likely in retirement that are going to be medical. Whether that’s certain Medicare expenses, copays, prescriptions, whatever it might be, and having that pot of money in there, you can use it. You can use this for COBRA payments. You can’t use it for individual healthcare, there’s some other, depending on which Medicare supplement or advantage plan you choose, you might or might not be able to use your HSA. So you want to make sure you’re looking at the qualified expenses.

But for those individuals that aren’t keeping receipts and then doing that reimbursement down the road, I would argue that there’s still tremendous utility in using that HSA as a retirement savings account. Invest that money. Don’t leave it in the cash earning nothing, move it over into a mutual fund based off your risk preferences, comfortability, all that good stuff, and treat it just like your other retirement accounts. It’s a wonderful tool that you can do, assuming your cashflow currently can absorb some of those medical costs you would traditionally use it for. Some families, Walt, even if they are reimbursing themselves, maybe they’re not having enough medical expenses to grow it down and you find yourself accumulating 15, 20, 30,000 just by having good luck from a health standpoint, too.

Walter Storholt:

Yeah.

Tyler Emrick:

That’s always there. But these should be really one of the first places that you’re saving while you’re working.

Voiceover:

What would your life look like if you designed it around your true wealth? It’s a powerful question and one that True Wealth Design helps individuals, families and business owners answer every day. With a fully integrated approach to financial planning, tax strategy, investments and business advisory, their team can bring clarity and confidence to every part of your financial life. Take the first step toward a stronger financial future with a no cost, no obligation discovery meeting. Just click the link in today’s show description to get started.

Walter Storholt:

Is there an amount that’s too big to accumulate in your HSA where you’d be like, “I think you got enough in there?” Or you’re gung ho, go for it?

Tyler Emrick:

Gung ho, go for it, yeah. Now you’re going to be capped a lot of times because you can only put a certain amount in.

Walter Storholt:

Sure.

Tyler Emrick:

Just like Roth IRAs and things like that. So the IRS, that’s their way of limiting how much, they limit how much you can put in.

Walter Storholt:

Right.

Tyler Emrick:

So that’s their way to cap it.

Walter Storholt:

Can’t go drop a million in there this year.

Tyler Emrick:

You got it.

Walter Storholt:

But over the course of a long career if you were putting a significant amount in and not using it all.

Tyler Emrick:

Yeah, even if you were putting in … The limit’s, in prior year, maybe six grand, seven grand, eight grand.

Walter Storholt:

Yeah.

Tyler Emrick:

It could probably keep going up each year. But around those ranges, you’re maxing out. Absolutely over a 10-year, 15-year period, it’s really going to become sizeable.

Really, if you think about it, if you’re five years out from retirement, maxing out the HSA and using it five years out from retirement, maxing it out at almost 10 grand a year, that can get pretty sizeable, too. So it doesn’t have to be a, “Hey, I should have been doing this for 20 years.”

Walter Storholt:

Yeah.

Tyler Emrick:

Hey, if you’re five years out from retirement, this can still have very meaningful impact, especially for those individuals that are maybe going to retire before 65 and be on individual healthcare, be on COBRA, some of those other things. This can be a wonderful tool in your toolbox.

Walter Storholt:

That was one of the selling points for me to try to not use it last year and to try to have this mentality of treating it as that investment vehicle. One of the big selling points for me was, hey, you could use this to pay premiums if you want to retire early. I’m thinking 20-plus years down the line, “Well, what if I want to retire early?”

Tyler Emrick:

Sure.

Walter Storholt:

But a lot of people are stopped from retiring early because, “Hey, what do I do about healthcare?” So if I have these higher premiums because we don’t have the work plan anymore, or COBRA, or just whatever the solution ends up being to bridge that gap, who knows what the landscape’s going to look like that many years from now. But at least given some options to say, “Well, hey, now we can use this HSA pot to pay premiums on coverage and bridge the gap.”

Tyler Emrick:

Deductibles, whatever.

Walter Storholt:

Yeah. It gives just the flexibility, the option to maybe retire earlier that you might not otherwise feel comfortable enough doing if you didn’t have that opportunity.

Tyler Emrick:

No, absolutely. 100%. And the big key is there I get a lot is individuals didn’t realize they can go open an HSA anywhere they want. It doesn’t have to be tied to your employer. Again, there’s some benefit to doing it through payroll and doing it through your employer.

Walter Storholt:

Sure.

Tyler Emrick:

Getting from money and things. But for these catch up contributions, having a separate HSA is great.

And then the other big caveat is investing in it. The default for these HSAs, Walt, is just normally like a cash account and it’s just there.

Walter Storholt:

Yeah.

Tyler Emrick:

You got to be deliberate and actually move it in and make that election for a lot of these HSA providers to actually invest. Now a lot of times, they’ll make you keep a minimum in cash, 1000 bucks, 1500 bucks, something like that. And then the rest can generally be invested.

Walter Storholt:

Yeah, great. Great points, great details on the HSA today.

Tyler Emrick:

Oh, they’re great. Yeah. HSAs are good.

Walter Storholt:

If it’s something you’re interested in finding out a little bit more about, reach out to Tyler, have a conversation with one of the experienced wealth advisors on the team. It’s part of the whole retirement planning and financial conversation, certainly. You can do that, you can schedule a free 20-minute discovery call with a member of the team by clicking the link in the description of today’s show or just going to truewealthdesign.com and you’ll be able to schedule that time at your convenience. Again, truewealthdesign.com or click the link in the description of today’s show for all of that.

Tyler, great stuff today. Thanks so much for the help.

Tyler Emrick:

Yeah. We’ll catch you on the next one.

Walter Storholt:

Yeah. Go take a look at those HSAs, folks.

Tyler Emrick:

Oh, absolutely.

Walter Storholt:

We’ll see you next time right back here on Retire Smarter.

Disclaimer:

Information provided is for informational purposes only and does not constitute investment, tax or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.