Are you taking full advantage of your Health Savings Accounts (HSA)?
Confusing HSA and FSA
A Flexible Spending Account (FSA) is another type of tax-advantaged savings account for healthcare. While the acronyms used for FSA and HSA are similar, there are some important differences to be aware of if your employer gives you the option of using either one.
Assuming HSA is not valuable if you are older
If you are already in your fifties, you might think that contributing to an HSA is not valuable. At this point, you may be focused on maxing out your 401(k) or Individual Retirement Account (IRA). However, that doesn’t mean you can’t benefit from an HSA later in life.
Missing out on employer matching contributions
401(k) is not the only way to get some free money in the form of a company matching contribution. Employers also have the option to provide a matching contribution to employees’ health savings accounts. The problem is that the total contributions to the account – including what you deposit and what your employer contributes – cannot exceed the annual contribution limit.
Not considering the bigger picture
The primary function of an HSA is to help you take advantage of some tax benefits while saving money for future healthcare costs. Don’t mistakenly think this is the only way to use HSA funds. Once you reach age sixty, you can withdraw funds from the HSA for any purpose without penalty. However, you will have to pay regular income tax on any amount you withdraw that was not used for medical purposes.
Using HSA for non-qualified expenses
HSAs do not cover all healthcare costs. If you misuse HSA funds to pay for a non-qualified expense, you may have to pay regular income tax on the amount, in addition to a 20% additional tax penalty if you are under age sixty-five.
Conclusion
If you have a health savings account, make sure to read the details of your plan carefully so you know what is covered and what is not. Don’t dismiss HSA if you are older or if you have other accounts you are using for retirement savings. If you stay healthy, an HSA can complement anything else you are saving in tax-advantaged brokerage accounts or taxable brokerage accounts.
FAQs
How can you use a health savings account effectively? To effectively benefit from a health savings account, maximize your annual contribution, especially if your employer matches your contribution. Also, be sure to know what the funds can be used for, and if you do not need them, keep them there until retirement when you can use them for anything you want – you will just have to pay regular income tax on non-medical expenses.
What is a disadvantage of HSA? The disadvantage of HSA is that the funds cannot be used for every healthcare cost. Some things that are not eligible include breast augmentation, childbirth classes, pillows or cushions, funeral costs, and insurance expenses.
Source: https://www.thebalancemoney.com/costly-health-savings-account-mistakes-4153790
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