It's easy to make the argument that the HSA is the best savings plan out there. The reason? It offers more tax breaks than any other account.
HSA contributions get to go in tax-free, and money you don't need to spend right away can be invested for tax-free growth. Withdrawals from an HSA are also tax-free as long as that money is used to cover qualified healthcare expenses.
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But if you're going to save in an HSA, it's important to manage your account wisely. And that means steering clear of these major blunders.
1. Assuming you're eligible from one year to the next
HSA requirements commonly change from one year to another. This year, for example, it takes a minimum deductible of $1,500 for self-only coverage to qualify, or $3,000 for family coverage. Come next year, though, these limits are rising to $1,600 and $3,200, respectively.
You can't assume that you'll automatically be eligible for an HSA in 2024 just because that was the case in 2023. Continuing to fund an HSA once you're no longer eligible could result in a pretty large tax headache, so make sure you get the right information before you start pumping money into an HSA.
2. Taking withdrawals every time a medical expense arises
The whole purpose of an HSA is to have funds to tap to cover medical expenses. But if you can afford to pay for near-term healthcare expenses out of pocket, you should do that before you dip into your HSA.
As mentioned earlier, you can invest HSA funds you don't need right away, and gains in your account will be tax-free. That's a pretty sweet deal.
Plus, there's a good chance your healthcare costs will be higher in retirement than they are today, and that's a time when your income is likely going down. So it pays to reserve that money for when you're more likely to really need it.
3. Continuing to fund your HSA after enrolling in Medicare
Once you enroll in Medicare, you can tap your HSA as needed to cover everything from copays to deductibles to services you need to pay for in full because Medicare won't pick up the tab. But you should also know that you can no longer contribute money to an HSA once you enroll in Medicare. And if you do, once again, you'll have a tax headache and potential penalties to deal with.
Furthermore, you should know that this rule applies even if you're only signing up for Medicare Part A. Some people enroll in Part A alone while they're still working to get free secondary insurance for hospital care (Part A is usually premium-free). But if you're doing that and staying on your employer's high-deductible health plan, an HSA will be off the table.
HSAs are a really handy tool. Not only do they offer a world of tax breaks, but once you turn 65, you can take an HSA withdrawal for any reason without a penalty. So if your senior healthcare costs come in lower than expected, that money is by no means wasted. But make sure you understand the rules of HSAs carefully, whether you've recently opened an account or have been contributing to one for years. A simple misunderstanding on your part could, unfortunately, lead to a world of regret.
