Five Ways to Maximize Your Health Savings Account

Mar 22, 2022 |

Improve your health care savings before you retire with health savings account tips.

Research shows that nearly 22 million people use a health savings account (HSA), and that number continues to rise. These accounts often prove invaluable throughout life, offering immediate funds to help pay for medical costs that insurance won’t cover without having to tap into your regular checking or savings account.

As a bonus, your contributions to an HSA are tax-deductible to help you maximize their benefits.

However, the glaring downside is that once you enroll in Medicare, you can no longer stash money in your HSA, which means you should do everything you can during your working years to maximize the account’s value.

First, let’s level set.

What is a health savings account?

A Health Savings Account (HSA) is a tax-advantaged savings account designed to help individuals with high-deductible health plans (HDHPs) save money for medical expenses.

How a typical health savings account works

– You must be covered by a high-deductible health plan (HDHP) to be eligible for an HSA.
– You cannot be enrolled in Medicare.
– You cannot be claimed as a dependent on someone else’s tax return.

Contribution Limits:
– There are annual limits on how much you can contribute to your HSA. These limits are set by the IRS and may be adjusted annually.
– Contributions can be made by you, your employer, or both. However, the total contributions must not exceed the annual limit.

Tax Advantages:
– Contributions to an HSA are tax-deductible, meaning you can reduce your taxable income by the amount you contribute.
– If your employer contributes to your HSA, those contributions are typically excluded from your gross income.
– The interest and investment earnings on the HSA balance grow tax-free.
– Withdrawals for qualified medical expenses are tax-free.

Qualified Medical Expenses:
– HSA funds can be used to pay for qualified medical expenses, including deductibles, copayments, prescription medications, and certain medical services not covered by your health plan.
– It’s important to keep records of your medical expenses to justify withdrawals from the HSA, as using the funds for non-qualified expenses may result in taxes and penalties.

– Unlike Flexible Spending Accounts (FSAs), the funds in an HSA are not “use-it-or-lose-it.” They roll over from year to year, and the account is yours even if you change employers or health plans.

Investment Options:
– Some HSA providers offer the option to invest your HSA funds once the account balance reaches a certain threshold. This allows your contributions to potentially grow over time.

– You can withdraw funds from your HSA anytime to cover qualified medical expenses. Some HSAs provide a debit card or checks for this purpose.
– If you withdraw funds for non-qualified expenses before age 65, you may be subject to income tax on the withdrawal plus a 20% penalty.

After Age 65:
– Once you turn 65, you can withdraw funds from your HSA for non-medical expenses without the 20% penalty. However, if used for non-medical expenses, withdrawals will be subject to income tax, similar to traditional IRAs.

It’s essential to review the specific terms and conditions of your HSA, as providers may have different rules and fees associated with their accounts. Additionally, tax laws and contribution limits can change, so it’s wise to stay informed about the current regulations.

Health savings account tips to boost your HSA balance

1. Max Out Your health savings account contribution Limits

Each HSA account has a contribution limit. Take time to compare your annual contributions to the contribution limit to see how much more you’re able to add to your account each year.

If you haven’t reached your HSA maximum by the end of the year, you can deploy the “last month rule” strategy and contribute the full yearly maximum on the first day of the last month of the contribution period (usually December 1). This is a particularly helpful strategy for new account holders that may not have been eligible to contribute earlier in the year.

And if you’re 55 or older, you can take advantage of catch-up contributions and add $1,000 per year.

One health savings account tip is that contributions to HSAs require you to be enrolled in your high-deductible insurance plan for the remainder of the year. If you drop your insurance, you will have to prorate your contributions, since only those with high deductible insurance plans are eligible for HSAs.

2. Transfer Funds from an IRA or Roth IRA to an HSA

If you’re just getting started with an HSA or nearing your retirement, you may find it beneficial to make a lump sum payment into your account. Take advantage of the once-in-a-lifetime rule that allows you to transfer funds from an IRA or Roth IRA into a health savings account without penalty.

The same annual contribution limits will apply, but it can give you a jump start on your savings if you have a new account or want to boost your savings before retirement.

3. Consolidate health saving accounts

Some people end up with more than one health savings account. For example, you might have had an HSA with a previous employer, and then opened up a new one with your current employer.

If you have multiple HSAs, consider consolidating them into a single account to reach the threshold for investment and accelerate growth. HSAs that are eligible for you to invest a portion of your funds require a minimum balance, so combining accounts can help you reach those requirements faster.

4. Invest a portion of your savings

If you have a minimum balance in your HSA (usually $2,100), you may be eligible to invest a portion of your savings. This can be an excellent way to grow your savings tax-free while also being able to pay for certain health care expenses, now and during retirement. The gains are not taxed if they are used to pay for medical expenses.

Health savings account tips should bear in mind that not all HSAs will be eligible for this benefit. Check with your provider to learn if you qualify.

5. Reimburse yourself

Even with an HSA, you may still find yourself paying for certain medical costs out of pocket. Ensure you save your receipts, as they may come in handy one day. Note that if you have good cash flow and a small balance in your HSA, you may want to pay for all medical expenses in an effort to grow the money now in a tax-free account and take more out tax-free later.

Many HSAs are flexible regarding the timeline in which you request reimbursements. If you have a healthy balance in your HSA, you may be able to reimburse yourself for all those out-of-pocket expenses to pay for major expenses.

For example, if you have a leak in your basement that needs repairing, you can cash in your medical receipts to get reimbursement and then use those funds to pay for your home repairs.

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