Contributing money to a health savings account, or HSA, is one of the smartest moves you can make for your retirement. Even though an HSA isn't a retirement plan in the same sense as an IRA or 401(k), it can be an extremely useful long-term savings tool.
But if you're going to maintain an HSA, it's important to manage that account wisely. Whether you're participating in an HSA for the first time in 2022 or not, here are three big mistakes to avoid.
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1. Not knowing that contribution limits went up
Just as IRA and 401(k) plan limits can change from one year to the next, so too can HSA limits increase. This year, contribution limits are slightly higher than they were last year. If your goal is to max out your HSA, you'll need to pay attention to the new limits, which are as follows:
- $3,650 if you're saving as an individual and are under 55
- $4,650 if you're saving as an individual and are over 55
- $7,300 if you're saving as a family and are under 55
- $8,300 if you're saving as a family and are over 55
Keep in mind that any employer contributions you get toward your HSA count against these limits. This is different from 401(k) plans, where employer matching dollars aren't counted against savers' annual contribution limits.
2. Spending HSA funds instead of saving and investing them
If you've saved in a flexible spending account in the past, you may be familiar with the idea of having to deplete your balance in a timely fashion to avoid forfeiting money. But HSAs work differently. HSA funds never expire, so you can carry that money forward indefinitely.
In fact, you should actually make a point to treat your HSA as a retirement savings tool and avoid dipping into it in the near term. Instead, aim to pay for immediate medical bills so you can keep your unused HSA funds invested. Any gains your investments generate will be free of taxes, leaving you with more money to access down the line.
3. Continuing to fund an HSA once you're on Medicare
If you'll be signing up for Medicare this year, it's important to halt HSA contributions before going that route. Though you can take HSA withdrawals to pay for healthcare expenses once you're on Medicare, you're not allowed to make contributions to an HSA once you're enrolled. This holds true even if you're only partially signing up for Medicare -- such as enrolling in Part A only because it's free while retaining employee health coverage.
If you keep funding your HSA once your Medicare enrollment is complete, you could face costly tax penalties. And so if you're turning 65 this year but want to keep funding your HSA, be sure to delay your Medicare enrollment -- which you can do without penalty as long as you're on a group health plan with 20 participants or more.
Know the rules
The more you read up on HSAs, the better a position you'll be in to make the most of yours. Be sure to avoid these HSA mistakes so you don't lose out on any of the benefits your plan has to offer.
