How to Use Your HSA as an Emergency Fund


If you have access to an HSA, you probably have already heard that it’s a great tax-advantaged retirement pool. But how?

The Benefits of an HSA

There are three main benefits of using a health savings account. Each of these benefits share one common theme: there are tax advantages.

1. Your Contributions Are Not Taxed

When you contribute to an HSA through your employer, this comes out before taxes (like your medical insurance or 401k contributions).

2. HSA Earnings and Interest Are Not Taxed. Ever.

Whether you keep your health savings account funds in low interest funds or high growth funds, you will have some earnings. But all of these earnings are and continue to grow tax-free. 

3. Distributions From Your HSA Are Tax-Free

As long as your health savings account distributions are used for medical expenses, they are tax-free.

This means that even if you are making $1,000,000 a year and have a large medical bill that requires you to take $10k from your HSA, you won’t pay income tax on that $10k (which would be $3,700 currently). This is unlike your 401k where you would be taxed on distributions. 

I’ve simplified the tax advantages of a health savings account above, so you should always confirm with an accountant when doing your taxes.

A New Perspective on HSAs: Emergency Funds

There is a different way of using a health savings account that I want to cover today. How can you use an HSA for an emergency fund?

There are two ways you can use your HSA as an emergency fund.

1. You Have a Medical Emergency

You can always draw on your health savings account tax-free to pay for medical expenses. So, if you have a medical emergency, you can take money out of your HSA to pay for that medical expense.

2. You Have Another Kind of Emergency and Have Unreimbursed Medical Bills

This is where the power of using an HSA as an emergency fund comes in. You don’t have to withdraw from your health savings account in the same year you have a medical expense.

This means that if you have prior year’s medical bills, you can withdraw up to that amount from your health savings account. This is the trick to using an HSA as an extra emergency fund.

How to Use Your HSA as an Emergency Fund

Did you know that you can use your HSA as an emergency fund? Here’s exactly how it works.

1. Contribute to your HSA

Each year, you should contribute the max amount (or whatever you can afford) to your health savings account.

2. Invest 

Invest the funds in your health savings account in low to medium risk investments (such as a mix of bonds and index funds). This will ensure that if you need to use your HSA sooner than retirement, you won’t be subject to significant market fluctuations. 

Alternatively, if you don’t anticipate needing to use your HSA for an emergency fund and plan to use it only for retirement, choose whatever asset allocation makes the most sense to you depending on your age and risk tolerance.

3. Pay Your Medical Expenses Without Using Your HSA

This is the trickier part depending on your income. But, if possible, pay as many medical expenses as you can without drawing on your HSA. 

Unlike an FSA, a health savings account is not use it or lose it. So, each time you get a medical bill, do not withdraw that amount from your health savings account. Instead, just pay it as you would any other bill.

4. Keep Track of Your Expenses

Keeping track of your medical and dental expenses is the part that requires some organization. But it’s necessary no matter when you want to draw from your HSA.

We keep a file folder of medical bills from each year. Then, we also enter the amounts in a spreadsheet. Over the entire course of your health savings account, whatever you have entered in this spreadsheet is the amount you can withdraw from your HSA at any time.

5. Withdraw as Needed

If you have an emergency that requires distribution, withdraw from your health savings account up to your already spent medical amount. 

Going back to the spreadsheet you created in #4, you can withdraw your total amount spent on medical expenses during the course of your HSA at any point in time. Then, make sure you record this on your spreadsheet as well.

Using Your HSA as an Emergency Fund: An Example

Over the past five years, I’ve contributed $15,000 to my health savings account (either directly or through my employer contributions). I’ve invested it and now have $20,000 in my HSA. 

In the span of the past five years, I’ve had $5,000 in medical expenses. I never withdrew from my health savings account during that time and always just paid these expenses like any other bill. 

I’ve kept my receipts and record of my expenses in a spreadsheet.

Now, let’s say that my car breaks down and I need $7,500 to replace the transmission. I only have $2,500 in my regular emergency fund. Where does the other $5,000 come from? 

I can take that out of my HSA to cover the $5,000 in medical expenses I’ve had over the past five years.

Unfortunately, once I take that money out, I can’t put it back in the HSA (it’s not a loan). But I will still have $15,000 that will continue to grow interest-free.

This isn’t necessarily the most tax-advantaged choice for an emergency fund, but it can work well in a pinch. 

You may have better sources to draw on for emergency savings depending on the extent of your emergency (like if you have to consider filing for bankruptcy). In this case, you should work with an accountant and a lawyer. 

The Bottom Line

While it may not be the best choice for your situation, using an HSA for an emergency is a great way to cover bills as another bucket of funds available to you in a pinch.

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