There's a reason health savings accounts, or HSAs, are such a powerful financial tool. HSAs allow you to save for qualifying healthcare expenses in a tax-advantaged manner. And they actually combine the benefits of traditional and Roth retirement accounts for maximum savings.
With an HSA:
- Contributions go in tax-free.
- Gains are tax-free.
- Withdrawals are tax-free as long as you're paying for qualifying healthcare expenses.
But if you're able to participate in an HSA based on your health insurance plan, it's important to make the most of your account. Here are three signs you may not be doing that.
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1. You're using your HSA like a checking account
You may be inclined to use your HSA every time you have a medical bill to pay. After all, that's what the money is there for.
But remember, HSA funds don't expire. You may be used to having to spend your money by a certain deadline with a flexible spending account, but those work differently.
So, it's a good idea to reserve that money for when you might need it the most, like a period of unemployment or retirement, when your healthcare costs might rise.
If you can swing near-term medical bills, you may want to pay for them out of pocket. That way, you can keep your HSA funds tucked away for a time when you might need that account even more.
2. The money you're not using is sitting in cash
The nice thing about HSAs is that you can invest funds you aren't using and grow that money into a larger sum. So, if your HSA balance is sitting in cash, it means you're missing out on a big opportunity.
It pays to explore your HSA's investment choices and put your money to work. Remember, those investment gains are yours to enjoy tax-free. And over a long window of time, those gains could be substantial.
3. You're not taking advantage of catch-up contributions
Just as individual retirement accounts (IRAs) and 401(k)s allow retirement savers to make catch-up contributions at a certain age, so do HSAs. If you can afford those catch-ups, that's even more money you can shield from taxes.
Keep in mind that with an IRA or 401(k), catch-up contributions begin at age 50. With an HSA, they start at age 55, and they're worth $1,000.
The more mileage you're able to get out of your HSA, the better. It pays to invest your HSA when you aren't using it, reserve that money for future needs, and make catch-up contributions to lower your taxes as much as possible in the near term.
