Here's Why I Don't Use My Health Savings Account for Medical Costs

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HSAs (health savings accounts) are the unsung hero of personal finances. These accounts allow people with qualifying high-deductible insurance plans to set aside $4,150 for single plans and $8,300 for families out of pre-tax dollars. Once you hit age 55, you can add another $1,000 per year.

HSAs work similarly to regular savings accounts , but have a few added benefits. HSA contributions are triple tax advantaged, which means you don't pay income tax when the funds come out of your paycheck, you don't pay tax on their growth, and you don't pay taxes when you withdraw the money, as long as the money is used for approved medical expenses.

A lot of people who have HSAs use the money as it comes in to cover medical expenses, which is a valid way to use them. However, my family uses ours a little differently.

When my daughter needed braces, we paid $2,000 in cash rather than tapping our HSA. In fact, we pay out of pocket for all medical expenses we can and don't touch our HSA. Here's why.

HSA funds can be invested

HSA contributions can be invested , allowing the money to grow. Assuming an average rate of return of around 8%, $2,000 could grow to $9,854 by the time we retire in around 20 years. So by paying in cash for our daughter's braces, we were able to leave that amount in our HSA, where it could earn us about $8,000 that we can use for medical expenses when we're older.

Remember, HSA growth is tax free as long as it is used for medical expenses. So, if my husband or I need cancer treatment or heart surgery when we're in our 70s, we can still use the money without paying taxes on it.

HSA contributions can be pulled at a later date

Our HSA account also provides a cushion if we hit financial hardships. Let's say something happens in five years, and we really need that $2,000 we paid for braces to repair the roof (which isn't a medical expense). We can use the receipts from the orthodontist to pull out the $2,000 we spent on braces and still pay no taxes.

This means that there's little risk in leaving the money to grow, and it creates another safety net in addition to our emergency fund, which we split between CDs and a high-yield savings account.

Approved HSA expenses are pretty broad and can include hand sanitizer, braces, glasses, teeth cleaning, acupuncture, athletic mouth guards, health-related books, and cough syrup. I do recommend keeping a file of medical receipts so you can pull the money out if needed later. You may also have an online portal where you can access the receipts.

The HSA gives us a cushion during retirement

The average American couple spends an average of $315,000 on medical expenses in retirement, according to Fidelity Investments. Of course, there is a risk that you'll have to spend more. By saving in an HSA now and not spending the funds, we're creating a nest egg specifically for medical expenses.

While no one can predict their future health (or stock market returns), knowing we'll be able to cover most medical expenses without using too much of our retirement savings makes me feel more secure. When we both pass, it becomes part of our estate and is then taxed as income.

Like most financial decisions, this isn't an all-or-nothing strategy. If you need to use HSA funds to cover medical expenses, do so! That is what it's there for. But it might be worth considering leaving at least some of your balance to invest and save for the future.

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