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Health Savings Accounts 101 (HSA)

How To Maximize Use Of An HSA

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  • According to Money Magazine, the single best HSA move you can make is to maximize your contributions every year.
  • If you can afford it, pay for medical expenses with non-HSA money. 
    • By paying with non-HSA money, you can leave the tax sheltered account untouched. Interest and investment returns accumulate tax free. They are not taxed later if you spend the money on qualified health expenses. Alternatively, if you spent your HSA money on health expenses, and saved after-tax dollars, the growth of those savings would be taxed, which reduces their overall value.
  • Don't go into expensive credit card debt to leave money in your HSA.
  • Keep the money in your HSA invested in guaranteed, fixed-rate accounts. 
    • Your health history leaves you vulnerable to ongoing medical expense. If you invest in stocks or other investments which can increase or decrease in value, you may get hit with needing money in a down turn and having to take an unnecessary loss. Even worse, if you take a financial beating, you're left with a health insurance plan that offers minimal coverage and not enough money to cover out-of-pocket expenses.
  • Look for an HSA account that doesn't have fees attached. Most plans come with fees, but not all of them.
  • Don't wait to find the ideal plan. For every month you delay opening an HSA, your maximum contribution for the year shrinks by one-twelfth. You can roll over your HSA to another company if you find a better plan later. Even if it is the last month of your tax year, you are treated as being an eligible individual for the entire tax year for purposes of computing the amount you can contribute to your HSA.
  • Read our information about maximizing use of your particular kind of health insurance. For example, if you have a Preferred Provider Organization (PPO) type policy, work the system to stay in network as much as possible. To learn more, see, Health Insurance. Also learn how to minimize what you pay when you purchase Drugs.
  • Don't give in to the temptation to avoid needed medical care just to hold onto money longer.
  • If you have both a 401(k) plan and an HSA, fund the HSA first. 
    • Both have the tax advantage of pre-tax contributions and tax free earnings. However, with an HSA, there is no tax on withdrawal for medical expense. Also, at age 65, you can use the money for non-health expenses without penalty, which is then subject to the same income tax as a 401(k).
  • Keep in mind that you can reimburse yourself for the money that Social Security withholds from your benefits to pay Medicare Part B, as well as payments for Medicare Part D and Medicare Advantage premiums.  (You cannot use the money for Medigap premiums.)  You may also make tax-free withdrawals to pay a portion of long-term-care premiums based on age.
  • The younger you are when you start an HSA, the better because you have a shot of accumulating money tax free longer.

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