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Identifying the common health savings account mistakes, identifying key strategies to maximize your HSA and exploring some of the practical ways to utilize your HSA over your lifetime.
If you’re like many people, you might not be getting the most out of your HSA. Let’s explore why that might be and how you can change it.
Understanding HSA Contributions and Limits
Firstly, let’s clarify how much you can contribute to your HSA. The contribution limits for 2024 are $4,150 for individual coverage and $8,300 for family coverage. However, many people aren’t maximizing these contributions. Why? One common misconception is that you can only contribute through payroll deductions. While this is the most common method, you are able to contribute outside of your payroll deductions all the way up to the max. This could significantly enhance your retirement savings due to the triple tax advantage HSAs offer.
HSA vs. FSA: Don’t Confuse Them
Another mistake is treating your HSA like a Flexible Spending Account (FSA). Unlike FSAs, HSAs don’t have a “use it or lose it” rule. Funds in an HSA roll over year after year and can be invested, allowing your money to grow tax-free over time. This means you can contribute the maximum amount to your HSA and not worry about spending it within the same year.
The Power of Investing Your HSA
A significant error many people make is not investing their HSA funds. If you’re only earning a meager 0.5% interest on your HSA balance, you’re missing out on potential growth. In fact, I recently helped a client move their HSA to a provider offering a 5% interest rate, resulting in an additional $6,000 in interest annually. This change alone can make a substantial difference in your retirement funds.
Using HSAs for Qualified Medical Expenses
HSAs are often referred to as “medical IRAs” because they offer similar benefits but with added advantages. Contributions are tax-deductible, growth is tax-deferred, and withdrawals for qualified medical expenses are tax-free. This makes HSAs incredibly valuable for covering future healthcare costs, which are a significant concern for many retirees.
You can also use HSA funds for certain insurance premiums, such as long-term care insurance, COBRA, and Medicare Part B. This flexibility adds another layer of security for your retirement years.
Strategizing Your HSA Usage
Instead of viewing your HSA as a passive asset, you can get more out of it by taking a more strategic approach:
- Max Out Contributions: Contribute the maximum allowable amount each year.
- Invest Wisely: Choose an HSA provider that offers high-interest rates or investment options.
- Delay Withdrawals: Pay for current medical expenses out-of-pocket if possible, and save the receipts. You can reimburse yourself later, allowing your HSA funds to grow.
- Keep Detailed Records: Maintain a spreadsheet of your medical expenses to simplify future reimbursements.
Planning for Excess HSA Funds
If you find yourself with excess HSA funds later in life, there are several options. Once you reach 65, withdrawals for non-medical expenses are treated like distributions from a traditional IRA, subject to income tax but no penalties. If you pass away, your spouse can inherit your HSA and continue to use it for qualified medical expenses. For other beneficiaries, the HSA balance becomes taxable income. Consider leaving excess HSA funds to charity, which can provide a tax-efficient legacy.
Maximizing your HSA can significantly bolster your retirement savings and provide a buffer against future medical expenses. To get the most out of your HSA, ensure you’re fully funding it, investing wisely, and using it strategically.