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In 2020 Avoid These HSA Mistakes

Tax Planning

Contributing to a health savings account, or HSA, is an efficient way to not only lower your taxes, but also help ensure that you have the money to cover near-term and long-term healthcare costs. But if you mismanage that account, it won't serve you very well. Here are a few key HSA mistakes to avoid in the coming year:

1. Not contributing more money than what you expect to spend this year

One of the things that make HSAs so great is that they're an extremely flexible savings tool. Unlike flexible spending accounts, the money you put in doesn't have to be used up from year to year. Rather, you can carry funds forward indefinitely, all the while investing them for added growth.

In fact, doing so is the best way to make the most of your HSA, so if you've been contributing just enough to cover your near-term healthcare needs, consider putting more money into your account this year. 

Many HSA holders specifically sock away extra funds so they can carry that money into retirement, when healthcare tends to be even more of a burden. Do the same and you'll have a dedicated source of funds to help cover medical expenses during your senior years, thereby reducing one potential source of stress.

2. Withdrawing funds for non-medical purposes

HSA funds are triple tax-advantaged. Contributions go in tax-free, as is the case with traditional IRAs and 401(k)s, investment growth is tax-free, and withdrawals are tax-free. But in exchange, the IRS wants you using that money for its intended purpose, healthcare expenses. If you withdraw funds for non-medical expenses, you'll be hit with a 20% penalty for doing so, plus you'll pay taxes on your withdrawal.

The rules change once you turn 65. At that point, you won't face a penalty for taking withdrawals for non-medical purposes but you will pay taxes on that money, so aim to reserve those funds for qualified expenses only. 

3. Forgetting about your catch-up

You may be aware that HSA contribution limits change from year to year. For example, in 2019, you were allowed to put up to $3,500 into an HSA as an individual, or up to $7,000 as a family. This year, those limits have increased to $3,550 and $7,100, respectively for 2020.

But if you're 55 or older, you have another opportunity to fund your HSA, and it's by making catch-up contributions. Specifically, you can put an extra $1,000 into your HSA on top of the new limit you qualify for, so don't forget to sock away that extra money if you're able to. Doing so will lower your taxes this year, all the while leaving you with more money for future healthcare bills.

4. Contributing when you're no longer eligible

HSA eligibility hinges on being enrolled in a high-deductible health insurance plan. For the current year, that means having an individual deductible of at least $1,400 or a family deductible of $2,800 or more. But deductibles can change from year to year, so check your plan to see what you're paying this year. If you don't meet the requirements to fund an HSA, you could wind up getting penalized for making contributions.

Furthermore, if you turn 65 this year and enroll in Medicare, you'll no longer be allowed to put money into an HSA. Keep that in mind if you're still covered by a group health insurance plan at work, because if so, you may want to hold off on signing up.

Participating in an HSA is a great way to lower your tax bill and amass some dedicated savings to cover your medical costs. Just be sure to avoid the above mistakes along the way.


The opinions expressed are for general information; you should consult your outside professionals and advisors for information regarding your individual situation.