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Financial Planning > Charitable Giving > Donor Advised Funds

Don’t Settle for Less: Key Steps to Maximize HSA Growth Potential

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Health savings accounts (HSAs) have been around for years, and most advisors are already familiar with the valuable triple tax break that these accounts offer. 

Despite this, many individuals who have access to an HSA savings option either fail to maximize contributions to the account or simply fail to take steps to allow the HSA to reach its full potential as an investment vehicle.  Using an HSA for its obvious tax benefits is only the first step to ensuring that the account lives up to its full potential, especially with respect to lower and middle-income clients. In order to make HSAs attractive to these clients, it’s important to examine the fine print on the account and, often, take proactive steps to ensure that the client is making the most of every HSA dollar.

HSAs: Common Mishaps

HSA funds can be withdrawn tax-free if they are used to cover qualified medical expenses (which is an expansively defined term that covers a myriad of expenses), so clients can maximize the tax-preferred treatment of the HSA if the funds are eventually spent on qualified medical expenses. Despite this, there is actually no requirement that HSA funds be withdrawn for this purpose.  This, coupled with the fact that the funds do not expire at year-end, makes an HSA a valuable investment vehicle.

However, for the lower income client, it is important to pay close attention to the fees and expenses associated with the HSA.  Many employer-sponsored HSAs charge a setup fee, as well as maintenance and transaction fees.  Maintenance fees can vary and are typically flat fees charged regardless of the account value (either monthly or annually).  Transaction fees are fees that are charged each time the client withdraws funds from the HSA to cover qualified medical expenses.

In many cases, the fees charged by an employer-provided HSA can be high, so that even if the client does not incur medical expenses and can allow the account funds to grow, the investment value of the account is reduced.

Some HSAs simply do not offer investment choices that appeal to the client, or offer choices with high investment-related expenses that a client with limited funds would ideally avoid—meaning that the client should be advised to pursue other options in order to maximize the value of the HSA.

Steps to Maximize HSA Value

Clients who find themselves faced with a less-than-ideal employer-provided HSA option should be aware that they can simply roll those HSA funds into any other HSA of their choosing—there are no limits on the amount of HSA funds that can be transferred into another HSA in a trustee-to-trustee transfer, and the client can transfer funds as often as he or she wishes. 

The client can also roll funds over from the employer-provided HSA to his or her own HSA (meaning that the client would receive a check and be responsible for depositing those funds into the second HSA within 60 days to avoid early withdrawal penalties).  Only one of these rollovers can be made in any 12-month period, however.

The client can maintain more than one HSA if he or she is otherwise eligible to establish an HSA.  This gives clients the option of shopping around for the most advantageous HSA, so that the client is not limited to the employer’s chosen HSA. 

While the client could simply establish and fund the HSA of his or her choosing (foregoing the employer-provided HSA entirely), the client would then be responsible arranging this (rather than taking advantage of automatic salary reductions to an employer-provided account).  Additionally, Social Security and Medicare taxes that do not otherwise apply to HSA contributions may be taken out of the client’s funds, further complicating the arrangement.

Importantly, clients should also remember that, while HSA funds can be withdrawn after age 65 for any reason without penalty, a 20 percent penalty applies to funds withdrawn before age 65 that are not used to pay qualified medical expenses.  Therefore, if the client needs to withdraw funds before retirement age, he or she should consider withdrawing those funds from a traditional retirement account, where the penalty for pre-age 59 ½ withdrawals is only 10 percent, instead of the HSA.


When it comes to managing an HSA, the investment advantages can be stretched much further than the triple tax savings already offered by an HSA—making it critical to remember that the client never has to be “stuck” with the employer’s choice of HSAs.

For previous coverage of using HSAs as investment vehicles see Advisor’s Journal

For in-depth analysis of HSAs, see Advisor’s Main Library

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