Health Savings Account (HSA) Mistakes To Avoid

Are you maximizing your HSA benefits?

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A health savings account (HSA) is more than just a way to save for future medical expenses. It can also yield certain tax advantages, while potentially shoring up your retirement strategy. 

The average 65-year-old couple retiring will spend almost $315,000 on health care retirement—if not more. That figure doesn't include the cost of long-term care, which can add thousands of dollars to the total. Medicare can pick up the tab for some of your health care costs in retirement, but it doesn't cover everything, including long-term care. That's where an HSA can be invaluable. You can withdraw funds from your HSA tax-free for qualified medical expenses. And, you can also tap your HSA for other financial needs—with a tax caveat, of course.

If you've got access to a health savings account, it's important to make sure you're maximizing its potential. That begins with avoiding these common mistakes. 

Key Takeaways

  • A health savings account (HSA) offers tax advantages for both medical expenses and retirement money,
  • To maximize the benefits of an HSA, do not get it confused with an FSA, or a flexible spending account—there are different rules for that account.
  • Even if you're closer to retirement, if you're not on Medicare, an HSA could help you save. for more costly medical expenses once you're in your 60s.
  • Take advantage of employer-matching contributions, and think big picture—this is money you could use down the road.
  • Just be careful: Not every health expense is covered by HSA funds.

Confusing an HSA With an FSA

A flexible spending account is another type of tax-advantaged savings account for health care. While the abbreviations for FSAs and HSAs are similar, there are some important differences to be aware of if your employer gives you the option of using either plan. 

First, an HSA allows you to save more for health care. Pre-tax contributions to an FSA and an HSA are capped at an annual rate every year, but HSAs allow you to contribute more—both if you're single or if you have a family health plan.

So why is that important? FSA contributions reduce your taxable wages (through pre-tax salary withdrawals), while HSA contributions are tax-deductible. Either way, you get a tax break, but maxing out your HSA could yield a larger tax benefit at the end of the year. 

The other thing to know is that FSA contributions typically don't roll over in full from year to year. Alternatively, FSA plans can allow a 2.5-month grace period after the end of a plan year to spend unused funds.

With an HSA, however, you can leave the money in your account until you need it. That means you don't have to frantically try to spend down those contributions each year. Instead, you can allow them to grow and earn interest.

Assuming an HSA Isn't Worth It if You're Older

If you're already in your 50s, you might think that contributing to an HSA isn't worth your time. At this point, for instance, you may be focused on playing catch-up with your 401(k) plan or an individual retirement account (IRA). That doesn't mean, however, that you can't still leverage an HSA later in life. 

Let's say you contribute $6,000 a year to a family HSA from age 50 until you reach age 65 (you can no longer contribute to an HSA once you enroll in Medicare). Assuming you earn a 3% annual return, you could accumulate over $110,000 for health care costs (before taxes). Even if you save less than that, every dollar you put away could be used to offset medical costs in your later years. 

Missing Out on Employer Matching Contributions

A 401(k) isn't the only way to snag some free money in the form of a company match. Employers also have the option of offering a matching contribution to employee health savings accounts. The catch is that total contributions to the account—including what you and your employer put in—can't exceed your annual contribution limit.

That means if you have individual coverage and your employer matches 100% of what you save, you could contribute half of the annual limit and your employer could match the same amount.


Matching HSA plan structures differ, so check with your employer for specifics. If a match is available, it ultimately reduces the amount you have to save, allowing you to maximize savings in other areas.

Not Thinking Big Picture

The primary function of an HSA is to help you enjoy some tax benefits while saving money for health care costs down the line. Don't mistakenly think that's the only way to use HSA funds, though.

Once you reach age 65, you can withdraw money from an HSA for any purpose with no penalty. You would, however, have to pay ordinary income tax on anything you withdraw that isn't used for medical purposes. 

That's important to know, especially if you haven't poured as much money into your employer's retirement plan or an IRA as you would have liked. Even if you don't end up needing to draw on an HSA to cover living expenses in retirement, it can provide peace of mind to know that the money is there if you need it. 

Using an HSA for Ineligible Expenses

An HSA doesn't cover every health care expense. If you mistakenly use HSA funds to pay for an ineligible cost, that can lead to a tax bite. You'll owe regular income tax on the money, plus a 20% additional tax penalty if you're under age 65.

The Bottom Line

If you've got a health savings account, be sure to read over the details of your plan carefully so you know what's covered and what's not. And don't count an HSA out if you're older, or if you have other accounts that you're using to save for retirement. If you stay healthy, an HSA could supplement anything else you're setting aside in tax-advantaged or taxable brokerage accounts. 

Frequently Asked Questions (FAQs)

How do you most effectively use a health savings account?

To effectively use a health savings account, max out the annual contribution, especially if your employer matches. Also, make sure you know what the funds can be used for, and if you don't need them, leave them there till retirement when you can use them for anything you want—you'll just have to pay ordinary income tax on non-medical expenses.

What's the downside of a HSA?

The downside of an HSA is that the money can't be used for every health care expense. A few things that are not eligible include breast augmentation, childbirth classes, cushions or pillows, funeral expenses, and insurance premiums.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Fidelity. "Planning for Health Care Costs in Retirement."

  2. Cigna. "Flexible Spending Accounts (FSA)."

  3. IRS. "Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans."

  4. Cigna. "Which Expenses are Eligible for HSA, FSA, and HRA Reimbursement?"

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