Health savings accounts (HSAs) are so popular these days that it’s hard to believe they’re not even 20 years old. But although they are quite common, people’s knowledge of how to get the most out of them is often a little behind. If you have an HSA or qualify for an HSA, here are five costly mistakes you don’t want to make.
1. Not contributing to your HSA
It’s a good idea to contribute to an HSA every year if you’re eligible and can afford it. As long as you have a qualifying health insurance plan — one with a deductible of $1,400 or more for an individual or $2,800 or more for a family — you can set aside up to $3,650 if you have an individual plan or $7,300 if you have a family plan in 2022.
These contributions reduce your taxable income for the year, and if you spend the money on medical expenses, it’s tax-free. It’s a benefit you won’t find with any other retirement account.
If you’re having trouble remembering to make contributions on your own, see if you can set up automated contributions. Remember to review your HSA plan annually. The government periodically increases annual HSA contribution limits, so you may be able to set aside more money in future years.
2. Not making catch-up contributions if you qualify
Adults 55 and older can contribute an additional $1,000 to their CGS in 2022. This means they can contribute up to $4,650 if they have an individual health insurance plan or $8,300 if they have a family plan. If you are able, you should try to set aside that extra money to help your balance grow even faster.
3. Not investing your funds
Many HSA providers allow you to invest your funds to help the plan grow faster. Unless you plan to use your HSA money for an expected expense in the near future, investing is a good idea. It can turn your HSA into a good addition to your personal retirement savings.
If you invested $3,650 in your HSA every year for 10 years, you would end up with about $52,300 if you had an average annual rate of return of 7%, even if you only contributed $36,500 yourself. The remaining $15,800 comes from investment income. And over time, this number will only increase.
If your current HSA provider does not allow you to invest your funds, you may want to seek out another provider that will. Be sure to research your investment options and fees before choosing a company to work with.
4. Spending your HSA funds on minor medical expenses
You are free to spend your HSA funds on whatever you want, but if you have a small medical bill, you may prefer to pay it out of pocket so you can leave your HSA funds alone. This way they will stay invested so that they can grow to an even bigger sum over time.
There’s nothing wrong with using your HSA funds to cover larger medical expenses. But if you think of your HSA as just another retirement account, take a step back and re-evaluate your savings strategy after a big withdrawal. You may need to set aside more money in your HSA or another retirement account in the future to stay on track.
5. Spending your HSA funds on non-medical withdrawals while under age 65
You can also use your HSA funds for non-medical expenses, but you will pay taxes on those. You will also be hit with a 20% early withdrawal penalty if you are under 65 at the time. This is stricter than the 10% early withdrawal penalty on under 59 1/2 that most retirement accounts have.
You should avoid non-medical withdrawals under age 65 at all costs – and even once you’re 65, you should only do so as a last resort. If you set aside the money for medical expenses, you won’t have to worry about paying taxes on them at all, and people often need more medical care as they get older.
If you avoid the mistakes mentioned above, you can end up with quite a large sum in your HSA. But keep in mind that HSA rules may change over time, so be sure to keep up to date with any changes. This will ensure that you don’t miss out on opportunities to get even more out of your HSA.