To contribute money to an IRA, all you really need is earned income, which a lot of people have. Similarly, if your employer offers a 401(k) plan, you may be eligible to participate as soon as you become an employee.
But eligibility for an HSA, or health savings account, isn't as simple. That's because your health insurance plan needs to meet certain criteria for you to be able to participate.
In 2024, you must have a minimum deductible of $1,600 for self-only coverage to qualify for an HSA, as well as an annual out-of-pocket maximum of $8,050. For family coverage, you must have a minimum deductible of $3,200 to qualify for an HSA, and your health plan must have an annual out-of-pocket maximum of $16,100.
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If your health insurance plan is compatible with an HSA this year, then it definitely pays to sign up. HSAs are loaded with tax breaks, so funding one could mean shielding some income from taxes and enjoying tax-free withdrawals for medical expenses.
But if you're going to participate in an HSA, it's important to understand how these plans work. And to that end, there's one big mistake you'll want to steer clear of.
Don't feel compelled to spend down your HSA
Many people are used to socking money away for healthcare in an FSA, or flexible spending account. These accounts give you a tax break on your contributions and don't tax withdrawals, but you're required to spend down your plan balance every year or otherwise risk forfeiting funds.
You may feel compelled to spend all of the money in your HSA this year for that same reason. But you should know that HSAs work differently from FSAs in that you don't have to do that. That's because HSA funds never expire on you.
In fact, HSAs are specifically designed to incentivize savers to keep their balances intact. That's because unlike FSAs, HSAs let you invest the money you don't need to withdraw right away. And investment gains in an HSA are yours to enjoy tax-free.
So, let's say you put $3,000 into an HSA this year. It may be that 10 years from now, your HSA balance grows to $6,000 even if you don't contribute another dime past 2024. If you don't have to spend the $3,000 you're putting in, don't. Instead, invest it so that it keeps growing.
A backup retirement plan
Not only should you not purposely try to spend down your HSA this year if you don't need to, but you should also consider doing your best to reserve your HSA funds for retirement. At that time, your healthcare costs might start to soar. And it'll be nice to have funds earmarked for medical purposes specifically.
You should also know that taking a non-medical withdrawal from an HSA will generally subject you to a costly penalty. But once you turn 65, those penalties are off the table, and you can remove funds from an HSA for any purpose without getting dinged.
In that situation, your HSA withdrawal will be taxable. But still, it's fair to treat an HSA as a backup retirement savings plan of sorts. So that's yet another reason not to spend down your balance this year if your medical expenses don't force you to.
