How to Get the Most Out of Your Health Savings Account

Looking to save and invest your money over time? One resource that you can take advantage of is in a very unlikely place: your health care. Introduced in 2003, health savings accounts, or HSAs, can help you reduce healthcare costs and increase your long-term savings.

Learn more about HSAs, and how you can get the most out of yours, below.

What is an HSA Account?

An HSA account is a special savings account that allows you to put aside pre-tax income for certain medical expenses. Qualifying expenses generally include:

• Coinsurance
• Copayments
• Deductibles

Not sure if you have access to an HSA?  You’ll most likely qualify for one if you’re enrolled in a high-deductible insurance plan. A deductible is the amount of money you have to pay out of pocket before your insurance kicks in. As of 2024, HSAs are available to individuals with insurance deductibles of at least $1,600. Family health insurance plans must have at least a $3,200 deductible for an insurance plan holder to qualify for an HSA. Additionally, HSAs are available only to individuals not on Medicare and cannot be claimed as a dependent on someone else’s tax return.

There are many benefits to using your HSA, including the ability to:

• Lower the amount of money you spend on your medical expenses each year
• Claim a tax deduction on the amount of money you’ve contributed to your HSA
• Defer taxes on any interest or investment gains you earn on your HSA until you withdraw the money
• Roll over money annually and use it in perpetuity
• Contribute to and use HSA balances in retirement

How to Get the Most Out of Your HSA

An HSA not only helps you reduce your out-of-pocket expenses for medical care: it can also help you improve your net worth. When you carry a balance in an HSA, you can invest it, earn income, and take advantage of the built-in tax benefits. 

To make the most of your HSA, you should take the following steps:

Maintain a Separate Emergency Fund

HSA funds are only meant for medical expenses. Withdrawing HSA funds and using them for other purposes will result in tax liabilities. So be sure to have separate liquid assets in another account that you can use for, say, an unexpected car repair, and leave your HSA for medical expenses.

Contribute the Maximum to Your HSA

You’ll get a hefty tax deduction if you contribute the maximum to your HSA each year. Holders of individual insurance plans can contribute up to $4,150 annually, while those with family plans can contribute up to $8,300.

If you can’t afford to contribute that much, contribute at least the amount you estimate you’ll spend in medical expenses each year. This will help you lower your overall medical expenses. Keep in mind that every dollar you save in your HSA that’s above your initial estimate can also be invested in stocks, bonds, mutual funds, and other securities.

Periodically Rebalance Your HSA Investment Portfolio

When it comes to investing, many people are in “set it and forget it” mode. They pick an initial asset allocation, invest it, and then don’t pay any more attention to it. The problem with this is that, over time, your portfolio may become overexposed or underexposed to certain assets relative to your initial allocation. That’s why it’s important to periodically check on your portfolio to ensure it’s still aligned with your investment strategy, financial needs, and risk tolerance. And if it isn’t, you need to rebalance your portfolio by selling some assets in classes where you’re overexposed and buying others where you are underexposed until your portfolio is realigned with your needs and preferences. You should do the same with your HSA.

Get Started at a Young Age

Most young adults have fewer medical expenses than older ones. By enrolling and contributing to an HSA when your expenses are relatively low, you can build substantial savings in your HSA that you can tap into when you eventually need it for major medical expenses. Plus, when you invest your balance over time, you can see significant growth in your net worth.

Choose Low Fee Investment Options

Beware of investment options with high fees, as these may reduce your HSA investment returns over time. When possible, choose low-cost options.

Common Mistakes to Avoid

To make sure you don’t leave any money on the table, be sure to avoid these common mistakes. 

Failing to Enroll

The most common mistake that individuals make is failing to enroll in an HSA. Some people may feel like they can’t afford to contribute to it on a regular basis. However, even small amounts over time can result in significant cost savings and investment gains. Save what you can, so that you’re ready for unexpected medical expenses — and build a nest egg in the process.

Not Saving Receipts

You’ll need to keep track of your receipts to prove you’ve used HSA funds on qualified medical expenses. HSA transactions are reported to the IRS by HSA providers, and in the event of an audit, you must be able to show that you’ve withdrawn funds to use on qualifying medical expenses.

Using an HSA When You’re Ineligible

While you won’t be able to obtain an HSA with a low-deductible health insurance plan, you may suddenly become ineligible to contribute to yours if you switch from a high-deductible plan to a low one. You’ll incur tax penalties if you inadvertently continue contributing to your HSA.

Using Your HSA for Ineligible Expenses

HSA funds can be used only to cover qualifying expenses related to diagnosing, treating, or preventing a medical condition. Some expenses, such as cosmetic or elective surgeries, may not qualify. Using HSA funds to pay for these particular expenses will also trigger tax penalties. So, it’s important to understand what you can and can’t use HSA funds for before scheduling medical procedures.

Spending HSA Funds on an Ineligible Individual

You can use HSA funds to cover medical expenses for you, your spouse, or a qualified dependent. However, you can’t use these funds for a friend, romantic partner, or other family member who isn’t a qualified dependent.

Contributing More Than the Limit to Your HSA

As with defined contribution retirement plans, like 401(k)s, the IRS sets the maximum contribution rate to HSAs each year. It’s important that you stick to these limits, especially if you contribute a percentage of your salary to your HSA and your income varies. If you don’t follow these guidelines, you could pay a 6 percent fine for money over the annual limit, so be sure to keep a close eye on your balance.