There are different savings accounts you might have access to that offer different tax benefits. But there's perhaps no single account that offers more of those than HSAs, or health savings accounts.
With an HSA, your contributions are made on a pre-tax basis, allowing you to shield some income from the IRS. You can then invest your HSA funds, and gains aren't subject to taxes. HSA withdrawals are also tax-free when used to cover qualified medical expenses.
But to really make the most of an HSA, it's important to steer clear of mistakes that have the potential to trip savers up. Here are three to avoid this year.
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1. Not realizing you're eligible
HSAs aren't open to just anyone. Your health insurance plan has to be compatible with an HSA.
But just because that wasn't the case in the past doesn't mean it isn't the case at present. It's important to review your health plan and see if it renders you eligible for an HSA this year.
In 2024, your health plan needs a minimum deductible of $1,600 to qualify for an HSA if you have self-only coverage. If you have family coverage, that minimum deductible rises to $3,200. Your health plan also needs to have an out-of-pocket maximum of $8,050 for self-only coverage, or $16,100 for family coverage.
If your plan falls within these guidelines, it pays to start allocating money to your HSA as soon as you can. Unlike an FSA (flexible spending account), you don't have to commit to a specific contribution the year before. You can make or change your HSA contributions at any time.
2. Spending your balance on near-term bills when you can afford to pay out of pocket
An HSA allows you to take a withdrawal at any time to cover a qualified medical expense. But if you want to make the most of your HSA, don't take a withdrawal every time a healthcare bill arises. If you can afford to cover those bills out of pocket, do so and save your money.
The funds you invest in an HSA get to grow tax-free. So the more money you leave in your account, the more tax-free gains you might end up sitting on down the line.
Plus, many people find that the cost of healthcare is higher in retirement than during their working years. So it pays to reserve as much money as possible for that stage of life.
3. Forgetting about catch-up contributions
This year, you can contribute up to $4,150 to an HSA if you have self-only coverage, or up to $8,300 if you have family coverage. But just as IRAs and 401(k) plans allow savers to make catch-up contributions, so too do HSAs. And it pays to make those because that's even more money you're shielding from taxes and getting to invest tax-free.
Whether you have self-only coverage or family coverage, the maximum catch-up contribution for HSAs this year is $1,000. And you're eligible to make catch-ups once you turn 55. Do note that this is a different age from when catch-ups become allowable for an IRA or 401(k) -- that's age 50.
HSAs really are a wonderful savings tool. Try your best to avoid these mistakes so you can reap the maximum benefits.
