In my early teens, I went on a community service trip in Ecuador. Each night, we gathered in a circle and reflected on our day, a famous quote, philosophical question, etc.

One night, we were asked, “Is it better to live as if you were to die tomorrow or live as if you are going to live forever?”

This was the first time I had been asked this and was taken aback. After considering for a few minutes, I reasoned that since I (likely) wasn’t going to die tomorrow and certainly wasn’t going to live forever, a balanced “middle path” was probably a good route.

Often times, with saving and investing, this same concept applies: Should I spend and not invest (i.e., live as if you were to die tomorrow) or invest and not spend (i.e., live as if you are going to live forever)?

The below 7 questions focus on how this idea uniquely applies to Health Savings Accounts (HSAs). 

1. Are you maxing out your retirement accounts and have low medical expenses?

For those with high income already maxing out their 401(k), an HSA can be a great location for additional savings to reduce your tax burden.

Example: Jackson and his wife, Leah, work at Google earning a joint income of $500k.  They are maxing out their 401(k)s and have the ability to participate in an HSA.  In 2021, by contributing $7,200, they would save $3,240 in taxes! *  

Following, if they have low medical expenses, investing the funds would avoid annual taxes on dividends, interest, and capital gains. 

2. What is your deductible?

A deductible is the amount you pay for medical expenses before insurance kicks-in and helps cover costs.  Keeping cash in your HSA equal to your deductible allows quick access to funds if unexpected medical expenses occur.  Money in excess of your deductible can then be considered for long-term investing.

3. What healthcare expenses do you expect this year?

If you expect large medical expenses for surgery, childbirth, etc., keeping more funds in cash would be beneficial to meet these expected medical costs.

4. What investment options does your provider offer?

A lot of providers offer limited investment options or charge high fees. Check with your provider to see available choices and the associated costs.  Over time, high fees can cause a meaningful difference in investment outcome.  There are many low-cost platforms with attractive investment options and positive user experiences.

5. Do you have an emergency fund?

Having an emergency fund allows you to weather large unexpected medical expenses without having to dip into your HSA. As Charlie Munger, vice chairman of Berkshire Hathaway, once said, “the first rule of compounding is to never interrupt it unnecessarily.”  An adequate emergency fund (or cash balance within your HSA) provides leeway for taking investment risk. 

Fun Fact: You can pay for qualified medical expenses with non-HSA funds (e.g., credit card) and reimburse yourself from your HSA after-the-fact.  Provided you keep sufficient records, you can even reimburse yourself years later!

6. What happens to an HSA once you pass away?

This is important to understand, because while HSA savings offer a deduction and investment avoids annual taxes, there is potential for incurring a large tax bill once you pass.  

Similar to a 401(k)/IRA, you can select a beneficiary to receive your HSA in the case of your passing.  Two scenarios:

1. Spouse Beneficiary – If your spouse is the beneficiary, he/she treats the account as if it was his/her own.  There are no tax consequences for the account ownership change.
2. Non-Spouse Beneficiary – If the beneficiary is anyone other than your spouse—child, grandchild, trust, estate, etc.—the entire account balance is taxed in the year of death.  For example, Roger passes away in 2021 and bequeaths a $100k HSA to his child, Leo.  The entire $100k would be taxable to Leo in 2021.  

Part of the beauty of an HSA is that you never have to pay taxes on dollars used for qualified medical expenses.  Leaving funds to non-spouse beneficiaries can lead to a big tax expense, especially if they are in a high tax bracket.

7. What can you use HSA funds for?

You might be surprised by the expansive list of qualified medical expenses.  Even if you are not going to a doctor, you can use HSA funds for acupuncture, chiropractor, flu shots, ibuprofen, contact lenses and solutions, prescription eyeglasses & sunglasses, LASIK, etc. 

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Conclusion 

Let’s return to the question, “Is it better to live as if you were to die tomorrow or live as if you are going to live forever?”

In the context of an HSA, there are benefits and risks at both extremes.  The correct answer to spending vs. investing will depend on your unique circumstances and goals and will almost certainly change throughout life as your personal-financial situation shifts. 

If you have any questions on how an HSA fits into your unique financial plan, please feel free to reach out.

*Assume 35% federal, 10% MN marginal tax rates