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Many people sign up for flexible spending accounts, or FSAs, because they allow you to contribute money on a pre-tax basis to cover healthcare expenses. But despite their name, FSAs aren’t so flexible.
With an FSA, you’re required to commit to an annual contribution ahead of your plan year and can’t make changes to that number unless you experience a qualifying life change, like a marriage or divorce. Also, FSAs require you to spend down your plan balance every year or risk forfeiting funds.
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That’s why, if you’re eligible for a health savings account, or HSA, you may find that it’s a much better plan in which to save. Like FSAs, HSAs allow you to set aside pre-tax dollars for healthcare. Only they’re far more flexible in that you can increase or decrease your contributions as you wish and don’t have to deplete your plan balance year after year.
But if you’re going to fund an HSA, it’s important to make sure you’re getting the maximum benefit out of it. Here are a few signs that you’re not actually taking full advantage of your HSA.
1. You’re withdrawing funds for every little expense
HSAs differ from FSAs in that they allow you to invest funds you don’t need right away to grow your money into a larger sum. Investment gains in an HSA aren’t taxed, and neither are withdrawals used for qualifying medical expenses.
That’s why it’s a good idea not to tap your HSA every single time you’re faced with a medical bill. If you can’t swing those bills without racking up debt, then yes, by all means, take an HSA withdrawal.
But don’t raid your HSA for every single bill just because the money is there. Instead, your best bet is to carry your funds forward as long as possible so you’re able to benefit from those tax-free gains.
2. You’re not maxing out
If money is tight, you may not be able to max out your HSA. But don’t not max out your account just because you don’t anticipate needing all of your funds in a single year for healthcare spending. Remember, you can always carry HSA funds forward into retirement. And at that stage of life, you’re likely to need a lot of money to cover your healthcare bills.
Right now, HSAs max out at $3,850 for individuals and $7,750 for families. In 2024, these limits are rising to $4,150 and $8,300, respectively.
3. You’re not making catch-up contributions
Like with IRAs and 401(k) plans, HSAs offer a catch-up option for older savers. With an IRA or 401(k), you can start making catch-up contributions at age 50. With an HSA, that option doesn’t become available until you turn 55.
But it pays to take advantage of it because the more money you’re able to pump into your HSA, the more you’ll shield from taxes — and also, the more you might manage to bring with you into retirement. The catch-up amount for HSAs is $1,000 a year — the same as IRAs.
If you’re eligible to participate in an HSA, it certainly pays to do so. But try to manage and fund your account wisely so you’re able to reap the most benefit from it.
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