Hello Everyone,
Planning for retirement is always on everybody’s minds. Usually when we hear “retirement planning” we immediately think about our 401k and IRA. What if I told you we should also be thinking about our HSA right along with those other accounts? An HSA has enormous tax-saving benefits not only during retirement but also throughout the years leading up to it. A well-utilized HSA can set anybody up for financial security and success.
What Is a Health Savings Account (HSA)?
A Health Savings Account, or HSA, is a specialized savings account designed for paying qualified medical expenses. It covers a wide range of expenses, including doctor visits, prescription drugs, dental and vision care, and now even over-the-counter medicines. The funds in an HSA roll over from year to year, eliminating the worry of losing unused funds. Consider your HSA as a retirement savings account that can be used for medical expenses not covered by Medicare or even for long-term care.
Despite its many advantages, there are common mistakes that I see people make over and over with their HSAs that prevent them from fully utilizing the benefits.
In this blog post, we’ll explore the top 10 mistakes to avoid when managing your Health Savings Account.
- Failing to open a Health Savings Account when eligible: One of the most significant mistakes is not taking advantage of the opportunity to open an HSA when you qualify for one. If you have a high-deductible health plan and meet the eligibility requirements, it’s essential to open an HSA. By not opening an HSA, you miss out on the valuable tax advantages, potential investment growth, and the ability to accumulate funds for future medical expenses. Don’t overlook this opportunity to maximize your healthcare savings and secure your financial future.
- Confusing an HSA with a Flexible Spending Account (FSA): One common mistake is confusing an HSA with a Flexible Spending Account (FSA). While both accounts offer tax advantages for medical expenses, they have significant differences. An HSA is paired with a high-deductible health plan and allows for contributions to roll over from year to year, while an FSA is a “use-it-or-lose-it” account with a set annual contribution limit. Confusing the two accounts can lead to misunderstandings about contribution limits, rollover rules, and eligibility criteria. It’s crucial to understand the distinctions between an HSA and an FSA to make informed decisions about your healthcare savings.
- Neglecting to invest HSA funds: Many account holders miss out on the opportunity to grow their HSA balance by not investing the funds. At least 9 out of 10 clients that send me their HSA account statements have the funds just sitting in cash, uninvested! Take advantage of investment options offered by your HSA provider, such as money market accounts, certificates of deposit, stocks, bonds, mutual funds, Treasury bills, and notes. Some providers even offer self-directed HSAs, giving you complete control over your investment choices.
- Failing to maximize contributions: To make the most of your HSA, contribute the maximum allowable amount each year. In 2023, the contribution limit for self-only coverage is $3,850, and for family coverage, it’s $7,750. If you’re 55 or older, you can make an additional catch-up contribution of $1,000.
- Misusing HSA funds: It’s essential to use your HSA funds for qualified medical expenses. By withdrawing funds for qualified reasons, you enjoy tax-free distributions. Avoid paying out of pocket or using other funds when you have an HSA specifically designated for covering medical expenses.
- Failing to understand the tax advantages: Contributions to an HSA are tax-deductible, and any interest or growth is tax-free. However, it’s crucial to ensure that withdrawals are used for qualified medical expenses to maintain tax-free status. Familiarize yourself with the tax benefits to make informed financial decisions.
- Not considering long-term care expenses: HSAs can be used to pay for insurance premiums for long-term care, COBRA healthcare continuation coverage, and Medicare if you’re 65 or older. Understand the scope of qualified medical expenses to effectively plan for potential long-term care costs.
- Overlooking the penalty for non-qualified withdrawals: Taking money out of your HSA for non-qualified medical expenses before age 65 subjects the funds to ordinary income tax rates and an additional 20% penalty tax. Avoid unnecessary penalties by using HSA funds exclusively for qualified medical expenses.
- Failing to account for required minimum distributions: Unlike some retirement accounts, HSAs do not have required minimum annual distributions. You have the flexibility to decide when to use your HSA funds. If you pass away, your spouse can inherit the funds without any tax consequences, but non-spouse beneficiaries face tax implications.
- Not reviewing eligibility requirements: Understand the eligibility criteria for HSAs. Ensure that you meet the requirements, such as having a high-deductible health plan, not being covered by any health insurance plan that is not a High Deductible Plan, and not being claimed as a dependent on someone else’s tax return. Additionally, it’s crucial to differentiate an HSA from a Flexible Spending Account (FSA) and understand the eligibility criteria specific to HSAs. By failing to review and understand these eligibility requirements, individuals may miss out on the opportunity to open and contribute to an HSA, ultimately losing out on the valuable tax advantages and savings potential it offers. Take the time to assess your eligibility and ensure you meet all the necessary criteria to fully utilize the benefits of an HSA.
I hope you find this info helpful and put it to good use as part of your overall retirement planning. In the meantime I’ll keep working harder to make you smarter!
