You’re probably using your HSA all wrong

I know I was.

If you have a Health Savings Account (“HSA”), then hopefully you already know the basics:

• It’s not use it or lose it – any money left over at the end of the year rolls over
• The money is yours, so it goes with you if you leave your job
• You have to be enrolled in a “high deductible healthcare plan” to make contributions to your HSA

Beyond that, there’s still a lot to be learned about this account, including how impactful it can be to your long-term financial plan and even how it could enable you to retire earlier than you think. With that in mind, here are a few mistakes I regularly see people making with their HSAs, including myself.

Mistake #1: Using the money for every eligible expense

Wait, what? Isn’t the whole purpose of an HSA to allow you to have tax-free money to spend on qualified medical expenses, you may be asking? Yes, that’s true – your HSA can be used for obvious things like doctor’s visits and prescriptions, along with less obvious things like sunscreen, band-aids, pregnancy tests and even condoms, but does that mean you HAVE to use your HSA for them? This was definitely a mistake that I made when I first opened my HSA.

Why I no longer use my HSA for little expenses 

I don’t want to sound like your mom, but just because you can do something doesn’t mean you have to. When it comes to your HSA, unless you’re going to be using a credit card and carrying a balance to buy eligible items, I’d suggest using your regular checking account for those expenses, while letting your HSA build up for bigger expenses like surgery, fertility treatments or even retirement.

When my husband and I spent tens of thousands of dollars on fertility treatments, it would’ve been very nice to have some of that money in my tax-free HSA rather than have piddled it away on $30 here and $10 there.

You can always change your mind

The best news is that if you change your mind, and let’s say you’ve collected receipts for your various expenses and they total $500, you can always go back to your HSA and take that money out in a lump-sum reimbursement if you want. The best part? There’s no time limit on when you can do that, as long as your HSA was established when the expense was incurred.

Just make sure you save those receipts – the IRS does not look favorably on poor HSA record-keeping and if you can’t prove a withdrawal was for qualified expenses, you’ll be slapped with income taxes plus a 20% penalty if you’re under age 65.

Mistake #2: Only funding the account to that year’s estimated expenses

I totally did this – because I’d been used to estimating my annual expenses in order to elect how much to put in my FSA and not risk losing any of it (key difference here is that S stands for spending instead of saving), I stuck with that same habit when I first started my HSA. I missed a huge opportunity not only to save on taxes, but also to plan ahead for unforeseen medical expenses to come (in one year I had a blood clot in my leg, a cancerous spot removed from my arm and went to PT for hip and foot issues – that was a very expensive year that I could not have predicted).

Remember, if you don’t spend the money in your HSA that year, that’s a good thing! You can let it stay there and accumulate for that next big thing that may otherwise have you using credit cards or borrowing from you 401(k).

Figuring out how much to put in your HSA 

I mean, really you should try to put the maximum amount in, especially if you’re saving more than your employer match in your workplace retirement account (aka 401(k) or 403(b), etc.). The HSA has better tax benefits (no taxes going in OR coming out) and chances are you’re likely to have some medical expenses before you can withdraw from your retirement penalty free anyway. If maxing out is not financially feasible, then aim to save at least the amount of your deductible each year. That way you know that if you do have some type of crazy medical event, you’ll at least have enough in your savings account to cover it.

Mistake #3: Spending down your account after switching plans

This was another mistake I made, which neglected the fact that I could always switch back to an HSA-eligible plan later so there was no need to spend what I had in my account just because I wasn’t currently adding to it anymore. When I last switched jobs, I went from an HSA-eligible plan to a lower deductible plan, then promptly spent down my remaining HSA balance from my previous job on little medical costs here and there. Imagine my annoyance when I decided to switch to an HSA-eligible plan the next year, realizing I could have already had a nest egg growing.

Because one of the beauties of HSAs is that you can continue to use the funds even if you switch plans, there are some planning opportunities for people preparing for elective surgery including lasik or even just orthodontia for you or your kids.

How one woman is using her HSA to prep for an eventual hip replacement

I work with a young woman who knows that within the next 5 years, she’s going to need a hip replacement. Because she’s a model, she’s vigilant about getting back to work ASAP after the procedure, so she’s already selected the provider for this surgery and has a plan in place for the swiftest possible recovery, which includes physical therapy and acupuncture. Based on the current medical plans available to her, her preferred providers are out of network and acupuncture isn’t covered by her insurance.

So while such a procedure is technically covered by insurance, she’ll still end up paying a higher out of pocket cost if she goes with the provider she wants to use. As of now, her plan is to accumulate as much as possible in her HSA until she needs the surgery, and if the timing is right, she’ll switch to a lower deductible plan for the year she’ll have surgery, which will help with some costs. The rest will be borne by her HSA. And if the surgery can’t wait until a new insurance plan year? She’ll remain on her current plan with even higher out of pocket costs, but at least she’ll have her HSA to alleviate the financial costs.

I could go on all day

There are so many amazing planning opportunities with the HSA, and this is just the tip of the iceberg. Shifting your perspective away from treating this as a spending account and instead thinking of it as a savings account with a special tax-free healthcare quality will go a long way toward getting you started on making the most of this powerful financial planning tool.

About the Author

Kelley Long

I believe that the true meaning of financial security is the ability to make decisions without having to worry about money. There are both factual and psychological aspects of this belief and my mission is to help people find that intersection in their own lives according to their personal values and goals.

I hold the CPA/PFS license and am a CFP® professional, but I don’t sell any products or manage any money. When I’m not writing, I’m working one-on-one with people through my coaching business, Financial Bliss with Kelley Long. I’m also a member of the AICPA Consumer Advocate Council and am frequently quoted in the press on financial literacy issues facing Americans.

I love to apply my own money lessons to my writing as well as break down some of the more complicated financial planning techniques into plain English. My goal in life is for all people to feel able to make their own financial decisions with confidence, being fully aware of the pros and cons of the actions they take.