Healthcare is a major burden for working Americans and retirees alike, and having a dedicated source of money to cover medical expenses could make them much easier to manage. Enter the health savings account, or HSA. An HSA is a hybrid savings and investment account that lets you set aside funds for healthcare expenses in a tax-advantaged fashion.

It pays to open an HSA if you're eligible, because in doing so, you could reap loads of tax savings on the medical expenses you have no choice but to pay for anyway. But if you're going to save in an HSA, be sure to avoid the following mistakes.

Doctor sitting across from couple


1. Contributing to an HSA when you're no longer eligible

The requirements to contribute to an HSA change from year to year, so it's possible to be eligible to participate one year, but lose that option the following year. In 2019, you can participate in an HSA if you have an annual deductible of $1,350 or more for single coverage or $2,700 or more for family coverage. At the same time, your maximum annual out-of-pocket costs must be $6,750 as an individual and $13,500 as a family.

But remember, just because you have a high-deductible plan this year doesn't mean you'll retain that plan in 2020. You may wind up with a lower deductible next year, and that could impact your HSA eligibility. Similarly, if you sign up for Medicare later in the year, you'll lose the option to fund an HSA at that point, even if you were eligible earlier on. Therefore, pay attention to the rules and confirm that you're indeed eligible to make HSA contributions to avoid tax repercussions after the fact.

2. Using your HSA for nonqualified medical expenses

The purpose of an HSA is to save money for qualified medical expenses, which range from diagnostic tests to medications to certain medical equipment. You generally can't use your money, however, to pay for elective procedures or cosmetic surgeries, so be aware of that before you make plans to spend your funds that way. Also, keep in mind that if you're under the age of 65 and you withdraw money from your HSA for nonqualified medical expenses, you'll not be forced to pay taxes on that sum, but you'll also be hit with a 20% penalty -- ouch.

3. Not carrying a balance from year to year

If you've ever had a flexible spending account, or FSA, then you're probably used to depleting your plan balance every year. If you don't, you risk forfeiting that money. HSAs work differently, however, in that you don't have to use up your plan balance from year to year. In fact, the whole point of an HSA is to contribute more money than you think you'll need in a given year (since that money goes in tax-free), invest the funds you don't use, and grow your balance (tax-free) into a larger sum. In fact, many people use HSAs as tools for retirement savings, since healthcare tends to be a substantial expense for seniors.

Opening an HSA is a smart move that could save you money in the long run. Just be sure to read up on how HSAs work to avoid mistakes that could end up hurting you.