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his article shows how clients can also reduce the annual limits on the
Tbenefit from viewing a health employee’s deductible contributions. An
HSA remains with a taxpayer after he or An HSA remains
savings account (HSA) as a flexible tax-
she leaves an employer or the workforce with a taxpayer after
favored investment strategy. HSAs allow
entirely, which adds portability to the
taxpayers of any income level to deduct he or she leaves
benefits of an HSA.
contributions immediately and withdraw Withdrawals from an HSA to cover an employer or the
the contributions, with accumulated the costs of qualified medical expenses workforce entirely,
investment earnings, free of tax at any as defined in Sec. 223(d)(2) are tax-free,
including withdrawals of investment which adds portability
age. That is, the “health” moniker can be
earnings on the HSA funds. Employees to the benefits of an
a misnomer by disguising a key benefit
can direct the HSA administrator to pay
of an HSA: An HSA can be a flexible HSA.
for qualified medical expenses directly
tax-favored investment vehicle. from the account. Indeed, some plans
Compared with more aptly named provide HSA participants with debit HSA. This approach is valid because no
individual retirement accounts (IRAs), cards to pay these expenses directly, time limit prescribes when a qualified
an HSA savings strategy (1) allows which can help the taxpayer meet the medical expense claim must be filed.
tax-deductible contributions like a tra- substantiation requirements. Regardless The ability to use an HSA as a tax-
ditional IRA but without its limitations of how medical costs are withdrawn, the favored investment vehicle depends on
on working alongside a Sec. 401(k); (2) taxpayer is responsible for documenting two things. First, when a medical bill
allows tax-free withdrawals like a Roth that the funds are used exclusively to falls due, the taxpayer must be capable of
IRA and without its income-based pay for qualified medical expenses, that paying it with funds outside the HSA.
contribution limits; and (3) avoids wait- the expense has not previously been re- The investment benefit decreases as
ing until retirement age for penalty-free imbursed or paid for by another source, the taxpayer draws on the HSA funds.
withdrawals of earnings, as required by and that the medical expense is not also Second, taking tax-free withdrawals de-
both traditional and Roth IRAs. This included among itemized deductions. pends in part on the taxpayer’s incurring
short article explains that U.S. tax law An alternate approach — the strategy medical costs that can be reimbursed
currently permits this tax-favored invest- recommended here — is for the taxpayer from the HSA upon submission of
ment strategy by effectively combining to pay the medical bills personally and receipts. Since some taxpayers and their
the tax benefits of an HSA with an request reimbursement of these costs families are relatively healthy, their
investment strategy.1 from the HSA only when he or she needs health decreases the flexibility of the
Sec. 223 allows a taxpayer covered by the funds. Of course, a taxpayer should HSA as a tax-favored investment vehicle
a qualified family high-deductible health carefully document each medical expen- from which funds can be drawn upon
plan (HDHP) to make deductible con- diture and carefully preserve this docu- quickly and without penalty. However,
tributions to an HSA trust account of mentation. However, there is no time even healthy taxpayers face regular
up to $7,300 in 2022 or $7,200 in 2021 requirement for requesting reimburse- health and dental expenses, which
(for taxpayers with a qualified self-only ment from the HSA. Therefore, a valid include unprescribed over-the-counter
HDHP, $3,650 in 2022 and $3,600 in tax strategy is to pay medical costs from medicine and menstrual care products,
2021). An additional $1,000 deduction non-HSA funds, retain the reimburse- that qualify for reimbursement. To the
is allowed for taxpayers who are at least ment documentation, and wait until the extent that a taxpayer pays these costs
55 years old at any time during the tax funds are needed to obtain reimburse- out of pocket and can substantiate they
year. Employer contributions made to an ment for the costs. Note, however, this were paid, these paid but unreimbursed
HSA are excludable from the employee’s strategy is only useful to the extent that costs allow the taxpayer to later draw
gross income (Secs. 106(d) and 125). the taxpayer can afford to pay the medi- on his or her tax-favored investment
The employer contributions to the HSA cal expenses from sources outside the as needed. One way to view paying

1. This article only summarizes, compares, and analyzes some of the key Tax Insider (Oct. 10, 2019); Mindy, “How to Make Sure an HSA Avoids
features of the HSA, traditional IRA, and Roth IRA tax-favored health and ERISA,” Tax Insider (Sept. 28, 2017); Doerrer and Trotta, “Developing a
retirement savings vehicles. Other sources should be consulted for com- Solid Approach to Advising Clients on Roth IRAs,” 51 The Tax Adviser 604
plete details, which could include related articles in The Tax Adviser and Tax (September 2020); and Lott “Roth IRA Planning,” 47 The Tax Adviser 202
Insider: Zonneveld, “Health Savings Accounts Can Save Taxpayers Money,” (March 2016).

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