Supercharge your HSA: 5 Strategies to Help Maximize HSA Contributions and Distributions

Supercharge Your HSA

Supercharge your HSA: 5 Strategies to Help Maximize HSA Contributions and Distributions

A Health Savings Account, or HSA, is a tax-advantaged investment account available to anyone with a high-deductible health plan.  The IRS will allow a family to contribute up to $7,750 to an HSA in 2023 (plus an additional $1,000 for those over 55) and the funds can be used for qualifying medical expenses tax and penalty-free.

The tax benefits, which we’ve outlined in further detail here, including tax-deductible contributions, tax-deferred growth, and tax-free qualified medical distributions at any time.  The triple tax-exempt nature of this account type makes it a potentially powerful vehicle for saving for future medical expenses.

There are two primary downsides to an HSA: 

1) The relatively low maximum contribution limit and 

2) The taxation of inherited HSA funds by a non-spouse beneficiary (the full balance must be taken as a taxable distribution)

People often find themselves looking for opportunities to increase contributions early on for the tax deduction and tax-deferred growth and then in retirement looking for opportunities to take qualified distributions tax-free.  This post outlines five strategies to get the most out of an HSA.

Funding an HSA for a Non-Dependent Child

If you have a child that has recently graduated college and joined the working ranks, there could be an opportunity to help them jumpstart their HSA account.  At this point in time – often ages 22-25 – they are no longer a dependent but still eligible to be on the family health insurance (they will be required to get their own health insurance at age 26).

If you have a child that meets this description, they are eligible to contribute the maximum family contribution of $7,750 to an HSA of their own in 2023 and that is on top of your max contribution.  The amount you contribute has no impact on their contribution amount and as a non-dependent, they are eligible for their own account.

If you are in a position to gift money to your child – the annual exclusion limit is $17,000 per person in 2023 – this may be a great place for those funds to go (in addition to their Roth IRA).  While the tax deduction likely won’t be as meaningful to them, assuming they have a lower income, the potential compounding of these funds can be substantial.

Example: Nigel and Phoebe have a daughter, Beatrice, who recently graduated college and began her first job.  At age 23, she is still eligible for her family’s health plan, which is a HDHP.  They would like to gift her the annual exclusion amount of $17,000 and want to use the funds to contribute towards tax-advantaged accounts where possible.  Because Beatrice will earn $40,000 this year, she is eligible to make a $6,500 contribution towards her Roth IRA and $7,750 into her HSA.  Nigel and Phoebe are able to contribute an additional $7,750 to their HSA (they are under 55).  *

Double Catch-Up Contribution for Married Couples

Once you reach the age of 55, you are eligible to make an additional $1,000 catch-up contribution to your HSA in addition to the $7,750 contribution for a family plan.  This additional contribution is commonly discussed and well-known.

What is often unknown is that once both spouses reach the age of 55, they can both make $1,000 catch-up contributions – allowing a married couple to contribute up to $9,750 to their HSA in a single year.

The caveat is that each $1,000 catch-up contribution must go into an HSA in that individual’s name.  Most couples will have one HSA that all contributions go into – and is generally in the name of the individual whose health insurance the family uses.  The spouse will need to open an HSA in their own name to contribute the additional $1,000 catch-up contribution.

Example: Nigel and Phoebe both turned 55 this year and are now each eligible for the $1,000 catch-up contribution.  They have a family HDHP through Phoebe’s employer and plan to fund the $7,750 family max and Phoebe’s $1,000 catch-up contribution to her pre-existing HSA.  In order for Nigel to make his $1,000 catch-up contribution he can open an HSA through the provider of his choice and make the contribution.  Altogether, they contribute $9,750 to their HSA’s in 2023. *

Make Contributions via Payroll

An HSA can be funded in three different ways: Employer Contribution, Employee Contribution made via Payroll, and Employee Contribution made Outside of Payroll.

Contributions made outside of payroll still receive the income tax deduction but those funds would have been subject to payroll (or FICA) taxes when you received your paycheck.  In 2023, FICA taxes are composed of both Social Security (6.2% of pay capped at $160,200 in wages) and Medicare (1.45% with no wage cap) for a total of 7.65%.  

Any employer contributions or contributions made through your employer’s payroll will not be subject to FICA, saving you the additional 7.65% if you are below the Social Security wage base.  This means those funds also won’t reflect as income on your social security calculation, however, this impact is likely negligible compared to the tax break.  If you plan to take a spousal or survivor’s Social Security benefit this would have no impact.

Example: Nigel and Phoebe would like to fund as much as possible through Phoebe’s payroll while also taking advantage of the double catch-up contribution.  They decide to run $8,750 to Phoebe’s HSA through her payroll for 2022 and make a direct contribution of $1,000 for Nigel.  Given that Phoebe is under the Social Security wage base, this move saves her $669.37 in payroll taxes. *

Save Qualifying Medical Receipts

In order to withdraw funds from your HSA tax-free you must incur a qualifying medical expense.  That said, there is no time requirement for when you are reimbursed for the qualifying expense other than death.

If you can afford to cover out-of-pocket medical expenses another way, you can save the receipt to reimburse yourself at a later date.  This effectively turns those funds into a tax-free bucket that you can access anytime for any reason.  

Oftentimes, a client who has implemented this strategy can wait until retirement and use their HSA in a similar manner as a Roth IRA up to the amount of unreimbursed medical expenses that they have.  This can be very useful if you are trying to keep your income down for a Roth conversion or are on the verge of going into a higher tax bracket.

Example: Nigel and Phoebe are now retired and through the various strategies discussed have amassed HSAs worth $500,000 with $150,000 in unreimbursed medical expenses.  With large RMD’s looming at age 72, they’d like to complete Roth conversions over the next two years.  They can reimburse themselves tax-free over that time period, allowing them to avoid taking taxable distributions from their IRA and instead converting funds to Roth. *

Parent Dependent

An HSA allows for you to reimburse not only yourself but also qualifying dependents.  With it becoming more common for parents to move in with an adult child as health declines this can put a financial burden on the whole family.

If you have a parent that has moved in and qualifies as a dependent, there are certain expenses that are eligible for HSA distributions.  Most notably, adult day care centers, transportation to and from eligible care provided by the care provider, or in-home (non-medical) care for your parent.

As with any qualifying expense, it is up to you if you’d like to pay the expense directly from the HSA or save your receipt and reimburse late.  

The nuances of HSA’s can be complicated.  It is always a good idea to discuss any strategies with a financial professional or your tax provider.

If you’d like to read more about HSA’s, you can do so here.

If you’d like to discuss your situation, you can schedule an introductory call here.


*Case studies are for illustrative purposes only. Individual cases will vary. 

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, you should consult with your financial advisor about your individual situation. This information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors we are not qualified to render advice on tax or legal matters. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.


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