Optimizing Use of HSAs (Health Savings Accounts)

By Alan Silverstein, Fort Collins, Colorado. Email me at ajs@frii.com.
Last update: August 5, 2020


Here are some thoughts about how to most effectively use an HSA (health savings account), for someone like me on an HDHP (high deductible healthcare plan). This might interest you if you are early-retired in the USA, meaning no longer on an employer's active or retiree plan (assuming not HDHP, although some employers do offer those), not on Medicaid (income not below 100% to 138% of FPL = federal poverty line, depending on location) and not yet on Medicare (age 65 or disabled).

I won't repeat all the important details of how HSAs work. You can find the rules on the web. For example here's one nice, albeit commercial, website.

My Suggestions

This is a strange game, but that's how the rules are written, as best I can decipher them. An HSA is not very instantly-gratifying. You must take solace in the intellectual awareness that all this foofahrah indirectly saves you, say, 25% of a lot of money.

One-Time HSA Funding

...from a traditional IRA

If you're over age 59.5, or even getting close, I think (although it's surprising) that you should never bother using your one-time traditional IRA trustee-to-trustee transfer to fund your HSA. Instead just take a penalty-free traditional IRA withdrawal/distribution (taxable via 1099-R as usual), and deposit it in your HSA (equally tax-deductible via 5498-SA), with the same result.

I believe this one-time transfer is only valuable when you're younger and facing a penalty for IRA withdrawals/distributions. Assuming you're on an HDHP that is.


So what's the point of doing a one-time traditional IRA transfer at all? Well if you're young enough (< 59.5) to face IRA early withdrawal penalties, it's a way of knocking down a large trad-IRA balance (minimizing RMDs many years later at age 70.5+, or later, age 72.0+) without paying a penalty, thus diverting some of your IRA money into paying eligible medical/vision/dental bills tax-free. (But not insurance premiums other than LTC, or if on COBRA or disabled, or non-Medicare supplemental at age 65+; nor OTC drugs unless you get a prescription for them.)

HSAs Are Stupid and Unnecessary

I know a lot more than most people about HSAs. I have some years of experience operating them (including one major mistake), plus I received training on how to tax-report them while a volunteer preparer. So forgive me a moment while I spout off about how utterly dumb they are -- but unfortunately still too valuable to ignore.

You'll read opinions from financial experts saying how HSAs are triply joyous because they feature:

This is all true, but come on... If the federal government wants people to pay for qualified medical expenses tax-free, why don't they just allow individuals to take above-the-line adjustments (deductions) for them, and be done with it? Get rid of all the hidden complexity behind HSAs, FSAs, and all of their evil brethren, and remove medical deductions (subject to a hurdle) from Schedule A too.

"But health savings accounts encourage saving money ahead of needing to spend it!" Yeah, right. Some people are willing and able to actually do this, but behavioral economics explains why most people don't, unless you make it a default behavior.

The devil is in the details, and HSAs have a lot of ugly details when you examine them closely.

Other Stray Thoughts