Are You Making These 3 Mistakes with Your HSA?

by Miranda Marquit · 7 comments

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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{ read the comments below or add one }

  • Fred says:

    I max out spouse’s and my HSA contribution each year. Keep the minimum cash required in the bank account to get the fees waived and put the rest in index funds at Ameritrade(where my bank allows an HSA brokerage account). If Ameritrade, or any broker, allowed me to send my HSA to them directly I would. It would save having to go through HSA Bank. But no broker allows it directly.

  • Lisa E. @ Lisa vs. the Loans says:

    I absolutely love my HSA! I just received a notice telling me about my options re: investing my HSA funds and I might just have to sign up!

  • Alex @ Credit Card XPO says:

    I was presented this HSA account option when I applied for ObamaCare. I chose not to participate because I didn’t know much about it. After reading your post, I think I should look into it.

    • David @ says:

      You definitely should. Just make sure you qualify and that you find a good place to store your money. Bad investment choices would reduce a sizable portion of the benefit.

  • David @ says:

    I’m going to go against Miranda’s advice here and say that you should try not to use the funds in your HSA account because you can invest everything in there tax free.

    A HSA, for those eligible, let’s you tax deduct the contributions and then is forever tax free. It’s the best retirement savings vehicle that should be fully taken advantaged of!

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