Why Young Lawyers Should Consider Using an HSA

The Health Savings Account is an often overlooked part of an employer's benefits but it is a powerful investing vehicle if used properly. For young and healthy lawyers, it features many useful and attractive benefits. First, it allows people to save specifically for future health care costs — an average American is expected to spend well over $300,000 on medical expenses over a lifetime. The HSA also offers a triple tax advantage available only to HSAs. This post covers three strategies for getting the most out of one.

What is an HSA?

A Health Savings Account is a savings account for medical expenses, offered in a tax-advantaged manner. Young and healthy professionals typically benefit most, though anyone eligible can use one. To qualify, you must be enrolled in a High Deductible Health Plan (HDHP — a deductible at or above $1,400 individual / $2,800 family), not be enrolled in Medicare, and not be claimed as a dependent.

Built to pay for medical expenses

A 2004 study found the average American spends $316,000 on medical expenses over a lifetime (women about a third more, largely due to longer lifespans) — and that figure has only grown with inflation and longer life expectancy since. Roughly 80% of expected lifetime medical expenses happen after age 40, and over half occur during retirement. Saving specifically for these costs now benefits young lawyers considerably down the line.

Advantages of the HSA

Portable and investable. An HSA moves with you when you change employers — nothing is owed back. Contributions are also investable, just like a 401(k) or IRA, allowing the balance to grow through compounding well beyond the amount contributed.

Triple tax advantage. The HSA is the only account in the U.S. with this feature: contributions are pre-tax, invested funds grow tax-deferred, and qualified withdrawals are tax-free. For lawyers in a high tax bracket, this can mean substantial savings.

The annual contribution limit for individuals is $3,600 (lawyers over 55 can add another $1,000). Employer HSA matches count toward this limit (unlike a 401(k) match) but are still worth taking — not taking an available match is effectively a pay cut. Note that California and New Jersey tax HSA contributions at the state level, and New Hampshire and Tennessee tax investment interest and dividends within an HSA — federal tax savings still apply either way.

A 2021 survey found only 9% of HSA holders actually invest their contributions, despite investment growth being where most of an HSA's long-term value comes from.

Distributions used for qualified medical expenses are always tax-free. Non-qualified withdrawals before age 65 face income tax plus a 20% penalty; after age 65 (or upon disability or death), non-qualified withdrawals are only subject to income tax, with no penalty — functioning similarly to a traditional 401(k) or IRA at that point, but without required minimum distributions.

Three HSA strategies for young lawyers

1. Use it to pay for current medical expenses. Since HSAs pair with high-deductible plans, using pre-tax HSA dollars to cover the deductible and other out-of-pocket costs is the most straightforward strategy — for a lawyer in the 24% bracket, that's effectively a 24% discount on medical costs.

2. Save and invest contributions for the future. Since most lifetime medical costs come later in life, lawyers who can afford to pay current medical bills out of pocket can instead let HSA contributions stay invested for decades, building a dedicated account specifically for future health costs — separate from 401(k) and IRA funds earmarked for lifestyle spending in retirement.

3. Save receipts for large tax-free distributions later. You don't have to reimburse yourself for a qualified medical expense in the year it happens. If you pay out of pocket and keep the receipts, you can reimburse yourself tax-free at any point in the future — even decades later — for expenses that were never previously reimbursed or deducted. This lets the HSA balance keep compounding while preserving the option of a large, flexible, tax-free withdrawal whenever it's needed most.

The HSA is a great investment vehicle for young and healthy law professionals. Taking advantage of its features early in a career can have significant financial benefits over a lifetime. Developing Financial implements strategies to maximize the value of an HSA for lawyers who would benefit from it.