5 Tips to Help You Maximize Your HSA Benefits
One of the most tax-efficient ways to save for medical expenses is by contributing to a health savings account (HSA). These accounts offer three valuable tax benefits to those who use them:
- Contributions are made with pre-tax dollars, which reduces an individual’s taxable income.
- HSA funds remain tax-exempt while invested in the account.
- Withdrawals from the account are tax-exempt when used to pay for eligible medical expenses.
However, HSAs provide more than just tax benefits. Following are five tips to help you get the most from your HSA.
#1 – Participate if you’re eligible.
Not everyone is eligible to contribute to an HSA, but if you are, it may be worth contributing. You may be eligible if you meet the following criteria:
- You’re enrolled in a high-deductible health plan (HDHP).
- You’re not claimed as a dependent on anyone else’s tax return.
- You’re not enrolled in Medicare.
- You’re not enrolled in a non-HSA-eligible plan, nor do you have a full-purpose flexible savings account (FSA).
As of 2024, eligible individuals who maintain health insurance for themselves can only contribute up to $4,150 a year to an HSA. Eligible individuals with family coverage can contribute up to $8,300 per year, and individuals aged 55 and older can make an additional $1,000 catch-up contribution per year.
Once you’ve contributed to an HSA, you can use the funds for any qualified medical expense, even if you no longer meet the eligibility requirements to contribute.
#2 – Use your HSA to save for retirement medical expenses.
Unlike FSAs that typically require you to forfeit any unused funds at the end of the plan year, HSAs allow you to roll over your assets from one year to another with no deadline for withdrawing assets. This ability makes HSAs an effective way to save for healthcare expenses in retirement.
Also, unlike with FSAs, your HSA isn’t tied to your employer, meaning you own the account and can take funds with you when you leave employment. The money in your HSA remains available to pay for qualified healthcare expenses, regardless of where you work or when you retire.
#3 – Invest within your HSA.
Many HSA holders are unaware they may be eligible to invest within their HSA. In fact, a recent study revealed that only 13% of HSA participants invested their assets in anything other than cash.[1] If you’re not investing within your HSA, you may be missing out on the potential for long-term growth.
Another benefit of investing within your HSA is that it can help protect the purchasing power of your funds over time, thereby serving as a hedge against inflation. Your wealth manager can help you identify HSA investment options that are in line with your financial goals, other investments, time horizon, risk tolerance and more.
#4 – Be aware of the potential tax implications of using HSA funds for nonqualified expenses before age 65.
HSAs can be a great way to pay for qualified medical expenses throughout your working years and long into retirement. There are no tax implications for withdrawing HSA assets as long as they’re used to pay for qualified healthcare expenses. However, if you’re younger than 65 and use HSA assets to pay for non-healthcare-related expenses, those withdrawals will be taxed as ordinary income and subject to a 20% early withdrawal penalty. That’s a steep price to pay if you’re not expecting it, which is why it’s important to be aware of these potential tax consequences.
Once you reach age 65, you can use HSA funds in any manner you wish without being subject to the 20% early withdrawal penalty. Income taxes will still apply if HSA assets are used to pay for non-qualified expenses.
