Health Savings Accounts: A Break in the Matrix

Amber Kodad |


  • A Health savings account (HSA) is available if enrolled in a high deductible health care plan (HDHP); HSA’s are portable
  • HSA contributions are income tax deductible and grow tax free if used for qualified medical expenses (some limited exceptions apply)
  • There are penalties for nonqualified HSA withdrawals and for excess contributions
  • If possible, investing an HSA as a retirement healthcare savings account is a best practice

You may remember the classic 1999 movie, “The Matrix,” in which human beings live in a computer program and are unknowingly trapped in an alternate reality. Neo, played by legendary Oscar-winning actor (well, not quite…) Keanu Reeves, becomes “the one” and is able to break the matrix and transform into a potential savior for all of humanity. When thinking about the matrix, an apt comparison could be the US tax code. We may be able to develop strategies to manage our taxes, but we are confined to the strict framework within the code. But what if there was already a break in the tax code? Are HSA’s, with their triple tax benefits, a break in the matrix?

While you must be enrolled in a HDHP to contribute to an HSA (HDHP minimum deductible is $1,400 individual/$2,800 family plan in 2022), contributions are income tax deductible, grow tax free, and funds are withdrawn tax free if used for qualified medical expenses (maximum contributions are $3,650 individual plan/$7,300 family plan in 2022; $1k additional catchup contribution if 55+). Contributions are FICA/payroll tax deductible if made directly from payroll, potentially saving another 7.6% in taxes. Additionally, HSA’s are portable and are not “use it or lose it.” Even if no longer enrolled in a HDHP, you can keep your account and make tax-free withdrawals for qualified medical expenses at any time.

There are a few important caveats when it comes to HSA’s. For one, penalties can be steep. Nonqualified withdrawals (withdrawals made for purposes other than qualified medical expenses) are subject to ordinary income taxes and a 20% penalty if made before age 65. Additionally, excess HSA contributions over the annual maximum contribution limit are subject to ordinary income taxes and a 6% penalty. There are also a handful of states that do not offer a state income tax deduction for HSA contributions or state tax free growth. Finally, although premiums may be lower for a HDHP than other types of health insurance plans, out of pocket costs could be higher if major medical care is required. It is important to review your health insurance options in detail before choosing a plan.

So how could we best utilize an HSA? If possible, a best practice would be to: 1) maximize tax deductible contributions annually; 2) use after tax funds to pay for current out of pocket medical costs; and 3) invest the balance as a retirement healthcare savings account to take advantage of tax-free growth. But what if you must withdraw HSA funds for current medical costs and are unable to implement this strategy? In that case, consider contributing enough to your HSA annually to cover current qualified medical expenses. Additionally, you could choose to implement a hybrid strategy by investing a portion of HSA contributions and withdrawing the remainder for current qualified medical expenses.

According to a recent study by the Employee Benefit Research Institute (EBRI), many people may not be utilizing an HSA to their advantage. The study found that less than 10% of HSA’s were in investment accounts and a meaningful percentage of HDHP enrollees did not even open an HSA. Whoa! Perhaps some of these people are unaware of the benefits of an HSA. Thankfully, you don’t need to be “the one” to take advantage of this break in the matrix!

As always, please reach out to your trusted advisor with any questions. 

Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through WCG Wealth Advisors, a registered investment advisor. WCG Wealth Advisors and The Wealth Consulting Group are separate entities from LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. WCG Wealth Advisors, The Wealth Consulting Group nor LPL Financial provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing. Investing involves risk including loss of principal.