Should You Spend Your HSA or Let It Grow? Why I Think Most People Get It Wrong

Short answer: If you can comfortably pay today's medical bills out of pocket, allowing your Health Savings Account (HSA) to continue growing may be one of the smartest long-term financial decisions you can make.

After helping individuals and families with health insurance for over 48 years and Health Savings Accounts ever since they were introduced as Medical Savings Accounts, I've noticed one common mistake. Many people think of their HSA as a medical checking account. When used strategically, an HSA can become one of the most tax-advantaged assets you own. That's why I often describe it as a Medical IRA.

There's nothing wrong with using your HSA to pay a doctor's bill or fill a prescription. That's exactly what it was designed to do. But if you automatically spend every dollar as soon as it goes into the account, you may be giving up one of its greatest advantages: the opportunity for long-term, tax-free growth.

Unlike a Flexible Spending Account (FSA), the money in your HSA is yours to keep for as long as you want. An FSA normally has a use-it-or-lose-it feature. That's why medical professionals are busy the last couple of months of the year. An HSA doesn't expire at the end of the year, and you don't lose it if you change jobs.

If your HSA provider offers investment options, you may be able to invest a portion of your balance instead of leaving it in cash. That changes the way you should think about the account. Instead of asking, "Can I use my HSA to pay this bill?", consider asking: "Do I need to use my HSA today, or would these dollars accomplish more if I let them continue growing?"

For many people, that simple question can change the value of their HSA over a lifetime.

One of the greatest advantages of investing is compound growth. A simple guideline known as the Rule of 72 estimates how long it takes money to double. Divide 72 by your expected annual rate of return, and you'll get the approximate number of years required for your investment to double.

At an average annual return of 8%, which I use here only as an illustration, a $1,000 investment could grow approximately like this:

• Today: $1,000
• After 9 years: $2,000
• After 18 years: $4,000
• After 27 years: $8,000
• After 36 years: $16,000

And of course, any investment advisor will tell you that there is no guarantee of future investment performance. Markets rise and fall, and actual returns will vary. The point is to demonstrate the remarkable effect of giving your money time to grow.

The real story here is not how much you make but the advantage of any tax-free growth and being able to access it later without paying tax.

If your budget allows, paying today's qualified medical expenses from your checking account instead of your HSA may allow your HSA investments to continue growing tax-free.

Another advantage many people don't realize is that you generally don't have to reimburse yourself immediately. If you pay a qualified medical expense with your own money and keep good records, you may reimburse yourself from your HSA years later, provided the expense occurred after your HSA was established and you have the documentation to support it. That gives your investments additional time to grow while preserving the ability to recover those expenses later.

The goal is to use it strategically. That is why I call it a Medical IRA. It offers a tax deduction when you contribute, allows tax-free growth while the money remains invested, and provides tax-free withdrawals for qualified medical expenses. It is the only account that gives you all three tax advantages.

If you withdraw money for non-medical purposes after age 65, you generally won't pay the additional tax penalty that applies to younger account holders. Instead, those withdrawals are typically taxed as ordinary income, much like a traditional IRA.

All retirees must eventually withdraw money from traditional retirement accounts because of Required Minimum Distributions. Therefore, it can make sense to use those IRA retirement dollars for everyday living expenses while preserving HSA funds for future healthcare costs, where qualified withdrawals remain tax-free.

While I believe many people spend their HSA too quickly, there are plenty of situations where using it immediately is the right decision. You may want to use your HSA today if:

• Paying out of pocket would create financial hardship.
• You would have to carry credit card debt to cover medical expenses.
• You need to preserve your emergency fund.
• You're likely to need the HSA money in the near future.
• You're uncomfortable taking investment risk.

Personal finance is personal. The best strategy is the one that strengthens your overall financial position, not simply the one that sounds the most sophisticated.

In summary, I believe one of the biggest mistakes people make is treating their Health Savings Account like a checking account instead of a long-term financial asset. If you have the flexibility to pay current medical expenses from other funds, allowing your HSA to remain invested may help build a tax-advantaged source of money for future healthcare costs and retirement.

Every situation is different, so don't assume the same strategy is right for everyone. But before automatically spending your next HSA dollar, pause and ask yourself one question: Would this money do more for me today, or would it do more for me twenty years from now?

And remember, spending money in the HSA for things that are not qualified medical expenses will cost you a 20% penalty and tax. So don't use it to buy that expensive bottle of wine for the party or the gift for your spouse's birthday.