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A health savings account (HSA) is arguably one of the best places to stash retirement savings and money you plan to use for medical expenses. But like most tax-advantaged accounts, HSAs have a lot of rules, and you need to follow them if you want to avoid costly errors and government penalties. Here are three of the biggest HSA mistakes you don’t want to make this year.
1. Not contributing if you’re eligible
You’re eligible to contribute to a health savings account in 2022 if you have an individual health insurance plan with a deductible of $1,400 or more or a family health insurance plan with a deductible of $2,800 or more.
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Individuals who meet this requirement may contribute up to $3,650 in 2022, while families may contribute up to $7,300. Any money you put in your HSA reduces your taxable income for the year, and if you use the money for medical expenses, you won’t owe taxes on it at all. You can also make nonmedical withdrawals, though you will owe taxes on these, plus a 20% penalty if you’re under 65.
Another plus for retirement savers is that the government will never force you to take money out of your HSA like it does with most other retirement accounts. You can leave your funds in there as long as you need to.
All these tax advantages make HSAs a great choice for those looking for another place to stash retirement savings. But if you fail to make your contributions by the tax filing deadline for that year (April 17, 2023, for 2022 contributions), you’ll miss out on the chance to earn a tax break and put away extra cash for your future.
2. Not investing your HSA funds
Many banks and brokers enable you to open an HSA these days, but the best ones allow you to invest your HSA funds. This enables them to grow more quickly than if they were stuck in a traditional savings account. As a result, your HSA funds end up worth considerably more in the long run.
For example, let’s say you contributed the $3,650 maximum to your HSA in 2022. If you left that money alone in a high-yield savings account earning 0.40% APY for 10 years, you’d only have about $3,799. This assumes you don’t make any additional contributions to your HSA during that time.
But if you invested your $3,650 and it earned a 10% average annual rate of return over 10 years, you’d wind up with $9,467. That’s a difference of $5,668. And the margin would be much greater if you’d consistently contributed to your HSA over those 10 years.
3. Not making catch-up contributions if you’re eligible
Adults 55 and older are eligible to contribute an extra $1,000 to their HSA in 2022. This brings their annual contribution limit to $4,650 if they have a qualifying individual health insurance plan or $8,300 if they have a family plan.
An extra $1,000 may not seem like much, but if it’s invested for a decade or more before you withdraw the cash, it could be worth quite a bit. A single $1,000 contribution invested for 10 years with a 10% average annual rate of return would be worth $2,594 — over 2.5 times your original contribution.
But just like contributions for adults under 55, you have to make your catch-up contributions by the appropriate tax deadline. Failure to do so means you miss out on the opportunity to set aside an extra $1,000 for that year.
If you avoid the three above mistakes, your HSA should grow into a nice supplement to your retirement savings in your other accounts. Then, all you have to do is stay mindful of any changes to the rules surrounding HSAs and double-check the annual contribution limits each year. These change periodically, and you don’t want to miss out on the opportunity to contribute even more to your HSA in future years.
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