4 tips to maximize your HSA

One of the most powerful tools for helping you cover health care costs is the health savings account (HSA), and the savviest savers are using it more like a retirement account. When used to pay for qualified health care expenses, HSAs are triple-tax-exempt: You don’t pay taxes on contributions, earnings or distributions.

Since health care will likely be one of your largest expenses in retirement, it’s important to make sure you’re maximizing this beneficial account. Here are four ways you can get the most out of your HSA.

1. Contribute if you can.

Unfortunately, not everyone can contribute to an HSA, but if you can, you should. In order to contribute to an HSA, you:

  • Must be enrolled in a qualified high-deductible health plan
  • Cannot be enrolled in Medicare
  • Cannot be claimed as a dependent on another person’s tax return
  • Cannot be enrolled in another health insurance plan other than those permitted, such as dental, vision, long-term care and disability insurance

If you meet these requirements, in 2024, you can contribute up to $4,150 if you have single coverage or $8,300 if you have family coverage. Additionally, eligible individuals ages 55 and older can contribute an extra $1,000 each year.

Plus, once you have HSA funds, you can use them whenever you have a qualified medical expense, even if you no longer meet the contribution requirements.

2. Save your contributions.

Many people treat HSAs as spending accounts, but if you can afford to pay your medical expenses out of pocket (i.e., with after-tax money), consider leaving the funds in your HSA rather than spending them. By treating this account as a savings account, you’ll be taking full advantage of all the tax benefits and increasing your ability to cover health care costs in the future, including in retirement.

3. Check out investment options.

Most HSAs allow the funds to be invested, allowing for higher growth potential for your savings. However, many HSA holders don’t take advantage of this benefit. In fact, only 12% of HSA account holders invested part of their HSA balance, according to a recent Employee Benefit Research Institute study. The remaining 88% kept their full balance in cash, ignoring investment vehicles available to them in their plan and thus depriving themselves of the growth potential offered by these investments.

Check to see if your HSA has these investment options, and consider whether investing some (or all) of your HSA funds would be beneficial. However, if you think you’ll potentially need to spend part of your HSA for health care expenses, make sure you leave enough in cash to cover those costs.

4. Don’t use your HSA for nonqualified expenses before age 65.

Before age 65, distributions not used for qualified medical expenses are generally taxed as income and subject to a 20% penalty. However, once you reach age 65, the penalty for nonqualified distributions no longer applies, and HSAs act much like a traditional retirement account when used for reasons other than qualified medical expenses. That said, qualified medical expenses will always be tax- and penalty-free, so that’s the best use for the funds at any age.

There are many benefits of an HSA as both a means to cover health care expenses and a retirement saving tool. Talk to your financial advisor about how taking full advantage of your HSA could help you achieve your financial goals.