Health savings accounts (HSAs) are the perfect financial safety net for out-of-pocket healthcare costs. But a quarter of American employees who are eligible to open an HSA never do. Are you one of them?
We totally understand that understanding all the benefits of an HSA can be confusing — but it doesn’t have to be. Below are five tips to maximize your HSA and save money, explained in the simplest terms.
1. Share your HSA with your family
If you’re married or have children, this is a huge benefit. You can use your HSA to pay for any qualified medical expenses your spouse or children incur — even if they’re not part of your high deductible health plan (HDHP).
The IRS also allows you to use your HSA to cover healthcare costs for anyone you claim as a dependent on your tax return, including foster children, adopted children, and relatives you support.
2. Pay less in taxes
HSAs are the triple-tax-advantaged, meaning you save money three ways:
- By contributing pre-tax dollars to your HSA, you lower your taxable income. Plus, any contributions you make with after-tax dollars can be deducted from your total income on your tax return.
- Unlike other investment accounts, any interest you earn on the money in your HSA is tax-free.
- Last, but certainly not least: you don’t have to pay tax on any withdrawals you make from your HSA for qualified medical expenses, now or in the future.
This makes HSAs the most tax-advantaged savings account in the country. You get more money to put toward healthcare expenses, while owing less to the IRS.
3. Rollover your savings
Unlike flexible spending accounts (FSAs), which have a maximum carry over amount of $500 per year, HSAs have no limit on how much you can carry over. For example, if you contribute $3,450 (the maximum amount for an individual plan in 2018) but only use $1,350 of that to meet your deductible, you’d have $2,100 left in your account to use next year.
This includes contributions made by your employer or anyone else and can go on indefinitely, making an HSA a great investment. The money in your account collects interest, so the more that’s in there, the more interest it will earn.
You can also keep your HSA if you change jobs or retire. As long as you still have a HDHP, you can continue making contributions. If you have an HSA but no longer have a HDHP, you’re still free to use the money for qualifying medical expenses but won’t be able to make any more contributions.
4. Play catch up with contributions
Each year, the government sets an HSA contribution limit. This means you can't deposit more money into your HSA over the course of a year than this pre-set limit. But there's a little-known rule that lets people who switch to an HSA mid-year catch up: the last month rule.
Let’s say you don’t have a HDHP for most of 2018 but you switch to one on or before December 1st, 2018. You would still be allowed to contribute the maximum amount to your HSA for that year ($3,450 for individual plans, $6,900 for family plans).
While it’s a good idea to contribute the maximum amount to your HSA each year, that may not be possible if you’ve just started contributing at the end of the year. The last month rule is great because it gives you the option of making prior year contributions to your HSA until the tax filing deadline, April 15th. This essentially gives you an extra 3 and a half months to contribute to your HSA.
5. Use it for anything after age 65
Before age 65, you can only use your HSA to pay for qualified medical expenses (without incurring a penalty). Not many people know that this restriction is lifted when you turn 65, so you can use your HSA for non-medical expenses.
Distributions used for non-qualified expenses after age 65 are subject to ordinary income tax rates, like any non-Roth IRA or 401(k) retirement account. But the more you contribute to your HSA now, the more you’ll have available later in life when you need it most.