Health Savings Accounts: Five Do’s and Don'ts for Best Utilizing Your HSA

DON'T take your HSA at face-value

At face-value, an HSA is a savings account to help you pay your medical bills. But, because of its unique triple tax benefits, your HSA can be so much more! Your HSA can serve as an integral part of your holistic financial plan, supporting your tax planning, retirement income planning, and risk management planning goals. 

DO max out your contributions

If your cash flow allows it, consider saving the maximum annual contribution in your HSA. In 2024, the limit is $4,150 for individuals and $8,300 for families, with an additional $1,000 catch-up contribution for those aged 55 and older. Like other tax-advantaged savings opportunities, such as 401(k)s and Individual Retirement Accounts (IRAs), HSAs are an opportunity to save on taxes today, while building a more financially secure future.

DON'T treat your HSA like a savings account

According to a study by the Employee Benefit Research Institute, only 12% of HSA account owners invest part of their HSA balance. That means that 88% of participants treat their HSA like a savings account, keeping their full HSA balance in cash. If these funds aren’t needed in the short-term, these HSA account owners could be missing out on long-term investment growth.

Some HSA accounts require a minimum balance in order to invest, and a few may not offer investments at all. But most HSA providers offer investments and not taking advantage is a missed opportunity. 

DO invest your HSA funds

If you are able to grow your HSA balance beyond your current medical needs (or if you are able to pay for your current medical needs out-of-pocket, see #4), take advantage of your HSA’s tax-free growth by investing your HSA dollars. Investment options vary by HSA provider, but most offer the opportunity to invest your savings in mutual funds or other investment options. Over the long-term, investing will allow your contributions to compound and grow at a faster rate. And, your investment earnings will be tax-free, as long as they are used for qualified medical expenses. 

Remember, investing in your HSA is like investing in any other account - it is never without risk. It’s important to have an investment strategy that fits your unique risk capacity, risk tolerance, and time horizon. Working with a financial advisor can help ensure your HSA investments are aligned with your short-term needs and long-term goals. 

DON'T confuse your HSA with your FSA

Unlike Flexible Spending Accounts (FSAs), which have a “use it or lose it” policy, funds saved in an HSA are portable, meaning they roll over from year to year. The money you save in an HSA during your working years can be used to pay for health care costs in retirement.

DO use HSA funds to save for retirement

Health care is well-known for being one of the biggest expenses in retirement. But even if it turns out you don’t need your entire HSA balance for qualified medical expenses during your golden years, there is no need to worry about saving too much in your HSA. After age 65, you can withdraw funds from your HSA for any use penalty-free. Withdrawals after age 65 that are not used for qualified medical expenses are treated as ordinary income, and taxed the same way as withdrawals from a qualified retirement account, such as an IRA. So, if you’ve maxed out your qualified retirement account contributions, your HSA can serve as an additional retirement savings vehicle. 

DON'T automatically use your HSA for current medical expenses 

Don’t automatically use your HSA to pay for your current medical expenses. If your cash flow allows it, consider paying your medical bills out-of-pocket. Keep as much of your HSA contributions invested as possible. This will allow the funds in your HSA more time to grow tax-free.

DO reimburse yourself for out-of-pocket medical expenses

Keep track of your out-of-pocket qualified medical expenses. Currently, there is no deadline for reimbursing yourself from your HSA. Take advantage of your HSA’s tax-free growth and tax-free withdrawals by waiting as long as possible to reimburse yourself for your out-of-pocket medical expenses. If you can afford to, wait until you have a major unexpected expense, or are in need for some tax flexibility for your retirement income. Then, reimburse yourself for those old medical expenses tax-free! 

DON'T spend your HSA dollars on ineligible expenses prior to age 65

The penalty for spending your HSA dollars on ineligible expenses prior to age 65 is a steep 20%. That’s twice the 10% penalty for an early distribution from a qualified retirement account. Plus, HSA withdrawals made for non-qualified medical expenses are taxed as ordinary income. So, it’s important to not take money out of your HSA for anything other than qualified medical expenses prior to age 65.

DO track your qualified medical expenses

Likewise, it’s important to track your qualified medical expenses. It would be a shame for a $500 medical bill to become a $600 expense simply because you didn’t save the receipt or invoice. With a triple tax advantage on the table, the IRS is not messing around. It is your responsibility to provide documentation if necessary.