Should I spend or save my HSA?

Save or spend? It’s the classic dilemma when it comes to money. And, it’s also a common question people have about the money in their Health Savings Account (HSA). After all, an HSA does offer the flexibility to do both. You could use funds in your account to help you pay for qualified health care expenses, but there also advantages to saving money in your HSA for future health care needs.

What you choose to do and when will depend on your individual needs and goals. But before you decide, it’s important to understand your options as well as strategies that can help you make the most of your account.

Spend: Pay for qualified health care expenses

You’re probably using your HSA to pay for qualified health care expenses as they come up throughout the year. That’s a good strategy because you are benefiting from using tax-advantaged dollars in your account to pay for qualified medical expenses.

Graphic with examples of qualified health care expenses with a photo of a mother and daughter at a doctor visit, photo of a woman getting her prescription medicine and a photo of a young girl getting an inhaler as care for chronic conditions.

Save: Prepare for health care needs in the future

But remember, HSA stands for Health Savings Account, and the opportunity to save and build your balance over time is one of the important features of your account. An HSA does not have any “use it or lose it” rules. If you don’t spend the money in your account, it rolls over year after year. You can use HSA funds to pay for qualified medical expenses anytime—and that can be in the current year, next year or even during retirement.

Saving in your HSA can help you plan for health expenses you anticipate in the coming years, such as laser eye surgery, braces for your child, or paying Medicare premiums. A longer-term savings strategy can help you build your account for when you may need the money the most—in retirement, when you’re likely to have higher medical expenses and less income.

Timeline graphic of future health expenses with photo of a woman at an ophthalmologist paying for laser eye surgery at age 32, photo a smiling child for paying for your child's braces at 45 and a photo of a senior couple on laptop paying for medicare premiums at age 65.

Even if you’re young and healthy, planning ahead for health care in retirement can be prudent, especially in light of rising medical costs. One study shows that a couple retiring at age 65 today could need as much as $301,0001 to cover their health care needs, and, on average, Medicare only pays 68% of health care expenses.2 If you’re counting on using your retirement savings account to pay for health care needs in retirement—it’s important to keep in mind that withdrawals from a traditional 401(k) are taxable while withdrawals from your HSA for qualified medical expenses are tax-free.

How to start saving

Now that you understand the reasons people choose to save their HSA for the future, you may wonder what you can do now to start building your account balance. Here are three strategies to consider:

  1. Consider increasing your payroll contribution

    You can set aside money from your paycheck on pre-tax basis, or make an additional contribution directly to your account anytime throughout the year. These after-tax contributions may be eligible for federal tax deductions when you file your taxes. Even a small increase of $50 or $100 could make a difference over time. If you’re 55 or over, consider a catch-up contribution. Be sure to check the contribution limits established each year.

  2. Set up your HSA investment account

    You have the option to invest a portion of your balance in mutual funds for potential to build your balance over time. For example: Assuming a 5% rate of return when saving just $150 each month, you can potentially grow that balance to $88,000 over 25 years, where that balance would have only reached $45,000 if you had kept it in cash. Consider getting started with the investment feature today—you can set up your investment account at any time. Learn more.

    Why consider investing your HSA?

    (Potential impact when saving $150 per month in investments compared to cash)

    Chart showing comparison between HSA investment and cash account balances when choosing to save $150 per month over 25 years. Assuming 5% return, the investment account would total $88,218 in 25 years. Assuming 0.03% return, the cash account balance would be $45,170.

    Investment scenario assumes a monthly contribution of $350 and monthly withdrawals of $200 for a net savings of $150 per month with a 5% rate of return for 25 years. Cash scenario assumes a monthly contribution of $350 and monthly withdrawals of $200 for a net savings of $150 per month with an interest rate of 0.03% for 25 years.

    Hypothetical results are for illustrative purposes only and are not meant to represent the past or future performance of any specific investment vehicle. Investment return and principal value will fluctuate and when redeemed the investments may be worth more or less than their original cost. While you can use your HSA to pay or be reimbursed for qualified medical expenses, if you receive distributions for other reasons, the amount you withdraw will be subject to income tax and may be subject to an additional 20% federal tax.

  3. Withdraw less

    You may want to consider withdrawing less from your account to pay for current expenses—leaving your HSA balance untapped, and providing the opportunity to keep that unspent balance working for your future. For tips on how to spend less, read “Spend less of your HSA to save more”.

Balance your needs

How you use your HSA really depends on your health care needs and longer‑term goals. It’s all about balance: Spend when you need to and save as much as you can to take advantage of the benefits of your HSA that can help you be ready for the future.

Increase savings and decrease spending graphic.

1Source: Employee Benefits Research Institute, Issue Brief, no. 481, May 16, 2019. A 65-year-old couple, both with median drug expenses needs $301,000 to have a 90% chance of having enough money to cover health care expenses (excluding long-term care) in retirement. Savings needed for Medigap Premiums, Medicare Part B Premiums, Medicare Part D Premiums and Out-of-Pocket Drug Expenses for Retirement at age 65 in 2019. A 65-year-old man needs $144,000 or a 65-year-old woman would need $163,000 to have to have a 90% chance of having enough money to cover health care expenses (excluding long-term care) in retirement.

2Source: Medpac, July 2020 Data Book: Health Care Spending and the Medicare Program. Total spending on health care services for noninstitutionalized fee-for-service Medicare beneficiaries.