Health Savings Accounts – First Save. Then Invest. Decades Later, Reimburse.

As you likely have heard, health savings accounts (often shortened to HSAs) are great but an often underutilized or misunderstood tax benefit.  Millions of articles have been written on the topic, and I would say that’s warranted given their excellent tax benefits.  What is not often showcased is how families track these expenses, so that’s what I plan to do in this article. 

Why Are Health Savings Accounts So Great?

They’re hugely beneficial for two reasons:

1. Any contribution you make is considered pre-tax, meaning you get a deduction on your income taxes. For example, let’s say you are over the age of 50 and plan to max out the 2023 family contribution at $8,750.  Let’s also say you are in the 32% marginal tax bracket.  Therefore, in this scenario, you would save $2,800 in taxes come year end.
2. When you invest your HSA, all the growth is considered tax-free if withdrawn for healthcare related expenses.  For example, let’s say over the years you have contributed/saved $75,000 into an HSA.  And by following a solid investment plan, it grew to $175,000.  That means the $100,000 in growth will not be taxed if used for healthcare expenses.  And the cool thing here is that the healthcare expense doesn’t have to be reimbursed in the year that it is incurred.  You can reimburse yourself for any healthcare related spend since you’ve been enrolled in an HSA eligible healthcare plan (e.g. a high deductible plan).   For example, I have been enrolled in a high-deductible healthcare plan since 2017.  I can then reimburse myself for hospital expenses incurred since then.   And with three kids since that time, I can tell you we have A LOT of healthcare spend that could be reimbursed if we suddenly needed the money.

How to Record Expenses

There is no one right way to do this.  Personally, I record it in a Google doc that I can access from any device. Once I make a payment, I immediately record the expense in my Google doc.  I record the following items:

1. Date of payment
2. Date of service (only if medical service or doctor visit, as payment is many weeks/months later)
3. Business (name of hospital, doctor’s office, CVS prescription, dentist, etc.)
4. Amount
5. Person incurring the charge (I like to track who my “sick” kid is)
6. Payment confirmation #
7. HSA Reimbursed?  (only mark yes if it has, otherwise it is left blank)

The total healthcare spend is then tallied at the top.  Therefore, I know that at any given time, I can access this amount of money tax-free.  It kind of acts as a secondary emergency fund though I never really want to touch it.  At least for another few decades.   Again, the longer I wait to touch this money, the more time it has to grow and compound income tax free.

What Do I Do with the Receipts?

I used to snap a picture and save them to my Google drive in a healthcare folder.  Not anymore.  Now, I just drop the receipt it into a “healthcare receipt” box in a closet.   It’s just easier.  That’s what this system accomplishes for me – easy tracking.  And for backup purposes, I save the end of year EOB – Explanation of Benefits summary from my health insurance provider.  

Just like retirement, this is a long-term play.  Yes, you get the immediate tax deduction today but the real benefit comes in the future.   For high earners, this could be the only way you get tax-free dollars, and if so, you should strongly maximize your HSA contributions, invest it, and then wait decades to reimburse.  However, you should start the expense tracking now so you can get all those HSA dollars back out tax-free.

Here is a template you can use to track your own.  Happy Tracking!

 Healthcare Expense Tracker - HSA.xlsx

Alex