Finding more freedom with an HSA

A recent grad ditches a flexible spending account in favor of a flexible, tax-advantaged HSA

When Riley Adams started his first job after grad school in 2014, he had the option of opening either a flexible spending account (FSA) or a health savings account (HSA). He was freshly off his parents’ health plan, and with little knowledge of or experience with health plans, he decided to go with an FSA. “You lose whatever you don't use by the end of the year, so I just put $100 in the account,” he says. By the end of the year, however, he hadn’t touched his FSA savings.

To use up the money, Adams bought a new pair of glasses even though he didn’t really need them — his current pair wasn’t old, and his prescription wasn’t outdated. While buying an unnecessary pair of glasses was a minor annoyance overall, he says, it underscored the key tension he felt with the FSA. “I’m essentially being penalized for trying to plan ahead and setting aside money, and then having good health throughout the year,” he says.

So when it came time for open enrollment, Adams ditched his FSA and opened an HSA. The switch made no difference to his health plan — he was still enrolled in a high-deductible plan that meant he paid very low premiums. And Adams understood the tremendous value of the HSA’s triple tax advantage.¹ “Ever since then, I've been putting as much money as I can into that account, and just letting it sit there,” he says. “Most of it is invested so that 20 years from now, hopefully it’ll have grown considerably.”

Planning for healthcare costs can be a challenge because it’s impossible to know whether or when you might get sick or injured. But Adams feels confident that, over time, the price tag of medical expenses will only increase. So, in his view, putting money away and allowing it to grow in a tax-advantaged account makes sense. He increased his contributions little by little each year until he finally reached the maximum contribution limit.

In 2019, Adams relocated to the Bay Area to work as a senior financial analyst for Google. He and his wife chose to continue using a high-deductible plan with an HSA, and they’ve been happy with it, even as they welcomed their first child — adding a new member to the plan. 

Adams’ strategy is to contribute the maximum to his HSA every year. He keeps the amount his family expects to spend on out-of-pocket costs in as cash as a precaution, then invests the rest. Adams thinks of the HSA as a long-term savings account that his family won’t draw from unless absolutely necessary. “If our budget allows and we’re in good health, I’d like to pay for any healthcare expenses out of our normal cash flow,” he says. “That way, we can leave the HSA untouched, so the money can continue growing in the investment account with those tax advantages.” In 2021, many Americans are looking to worry less about their finances, and an HSA might just be one way to do it.²