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Rx for Future Pain

Mark Eckman

HEALTH SAVINGS accounts (HSAs) were introduced in 2003, and have since become commonplace in employee benefit plans. My experience with HSAs dates to 2004, when my employer offered $400 in one-time seed money as an incentive to sign up.

HSAs differed from existing health-care flexible spending accounts, and offered some features I preferred. To me, the HSA’s most appealing feature was that I controlled the money. There’s no “use it or lose it” rule, as there is with flexible spending accounts. Unspent money could accumulate and continue growing year after year.

I also liked HSA’s triple tax advantage. There was no tax owed on my contributions, no tax on my investment earnings and no tax owed on withdrawals for qualified health-care expenses. This made my HSA even more tax advantageous than, say, Roth contributions to my 401(k), because the latter didn’t earn me an immediate tax-deduction.

My family members were all in good health when I signed up for a high-deductible health plan, which made me eligible to open an HSA. I planned to pay for health-care bills out of pocket and let the HSA grow tax-free. By keeping receipts for the medical bills I’d paid, I could always reimburse myself from my HSA if I needed cash.

At first, my HSA money sat in a checking account. The administrator required a $3,000 minimum to invest in a limited choice of mutual funds, plus the funds had front-end loads. Not very appealing.

Eventually, the administrator provided better options. With my aggressive investing style and the maximum contributions that I made each year, my HSA balance has grown significantly. It also grew because I didn’t take withdrawals for a long period.

My plan to conserve my health savings account was tested in January 2010, when I suffered a heart attack. Ever the planner, I remember thinking on the way to the hospital that this would ruin my HSA. Later, I realized this is exactly why I had the account—for health care expenses. As it turned out, this was my only withdrawal for medical expenses before retirement.

When I retired in 2021, my HSA had a balance of almost $60,000. Since I couldn’t make any more contributions once I was enrolled in Medicare, it seemed prudent to change investment strategy. I focused on dividends and interest with an eye to earning more consistent returns. I wanted steady results to pay the premiums on my Medicare Part D drug insurance.

My plan worked fine until interest rates started rising, and the value of my bond funds fell. As the financier J.P. Morgan said of the market, “It will fluctuate.”

While my health care expenses in retirement have been slightly higher than I expected, I continue to pay many of these bills with money drawn from sources other than the HSA. This year, however, I relented. I paid my deductibles and coinsurance for foot surgery—plus a trip to the emergency room—from my HSA. I did so to avoid making taxable withdrawals from my traditional IRA.

I paid most of these bills with dividend distributions that I hadn’t reinvested back into the market. That turned out to be a prudent move during 2022’s bond fund downturn. My plan is to continue using my HSA for my Part D premiums and for larger medical expenses. What if I want to draw down the account faster? I always have the option to reimburse myself tax-free using that box of medical receipts that date back to 2004.

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