It’s no secret that I love my Health Savings Account (HSA). I make regular contributions, and even maxed out my contribution last year.
The HSA isn’t for everyone, but if you have a high-deductible account, and can afford the out-of-pocket costs until you meet you deductible (I rarely meet my deductible, because I have few health care services needs), it can be a great tool.
Not only are your contributions to the account tax-deductible, but you can also withdraw the money tax-free when you use it for qualified health care expenses. This means you don’t have to pay taxes on your earnings if you use the money for the right things (watch out for penalties if you don’t, though!). Plus, your HSA can serve as another IRA if you build it up by the time you reach 59 1/2, with the same rules as a Traditional IRA when you use money for non-health expenses.
Many people remain unaware of some of the benefits of the HSA and are making the following three mistakes. Are you?
1. Not spending the money in your account
Some believe they can’t spend the money in the HSA right now. They think they have to be in it for the long haul. The good news is that this isn’t true.
You can, in fact, spend the money as you put it in. Cycling the money through your HSA can help you get an effective discount on health care services. You can use HSA money for co-pays and other qualified out-of-pocket expenses. If you’re careful about using your HSA for the right expenses, you can ease the impact of health care on your budget.
2. Not using the investment option
Did you know that your HSA is another investment account? Once you have a balance that reaches a certain amount (usually $2,000, but check with your employer and/or plan administrator), you can usually begin investing in index mutual funds.
You don’t have to settle for a low savings account rate on your HSA. You might have the option to see a higher — and potentially tax-free — return on your money when you take the time to diversify your HSA. Make sure it makes sense for your situation before investing the money in your HSA, since you have the potential for capital losses.
3. Not contributing once the year ends
Many people think they can’t apply an end-of-the-year bonus to their HSAs if they don’t contribute the money by December 31. Luckily, this is a misconception. You can contribute for the previous tax year up until tax day.
I know, because I’ve done it. I used some extra end-of-the-year income to max out my HSA contribution for 2013 — even though it was already 2014. If you can swing it, you can get an extra tax break by remembering you’re still eligible to contribute.
Do you have an HSA? What mistakes have you made with it?
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