Missed HSA Awareness Day? Here Are 4 Tips to Make the Most of Your Account

Take advantage of tax breaks and more with this flexible savings account.

HSA Awareness Day takes place each year on Oct. 15. The annual event celebrates the importance and benefits of health savings accounts, or HSAs. For qualified individuals, an HSA is the perfect savings account for setting money aside tax-free for short-term and future healthcare costs.

According to the IRS, to be eligible for an HSA, you must:

• Be covered under a high deductible health plan (HDHP)
• Not be enrolled in Medicare
• Have no other health coverage
• Not be claimed as a dependent on someone else's tax return

Funds in a health savings account can only be used to pay for qualified medical expenses. HSA funds spent for other purposes are subject to income taxes plus a 20% tax penalty unless you're 65 or older.

If you meet the qualifications mentioned above, you may want to consider opening an HSA soon if you haven't already. Here are some tips on how to get the most out of your HSA account this year.

1. Max out your HSA

Your employer may offer an HSA. If not, you can open one yourself if you're eligible. Some employers may choose to contribute or match your contributions. Regardless of what your employer does, you should max out annual HSA contributions.

Contribution limits for 2022 are $3,650 for individuals and $7,300 for families. Individuals aged 55 or older can contribute an additional $1,000 as a catch-up contribution. For 2023, contribution limits will be $3,850 for individuals and $7,750 for families.

Maxing out your HSA allows you to contribute and earn with triple tax benefits:

1. Contributions up to the annual limit are made pre-tax.
2. HSAs that allow you to invest funds let you earn without paying capital gains or dividend taxes on your profits.
3. Withdrawals for qualified healthcare expenses are tax-free.

As mentioned, some HSAs, like those opened through a brokerage firm, allow you to invest account funds. Maxing out contributions means you can take full advantage of the account's earning potential.

Plus, with HSAs, you can adjust your contributions as needed. If you initially contributed $200 per month, for example, you could adjust the amount more or less (up to annual limits) as your financial situation changes.

2. Leave it untouched

Some HSAs earn interest from the account balance. Others allow you to invest in stocks, bonds, and other investment funds. One of the best ways to maximize your HSA funds is to leave them alone to grow and compound.

There's always a risk when investing, so make decisions on how to invest HSA funds based on your risk tolerance. Check with your provider to determine how and when you're able to invest account funds.

3. Choose the right account

If your HSA is through an employer, you may not have much choice in what you can do with the account. However, many employers match employee contributions, making going through your employer an easy decision in those cases. The 2021 Year-End Devenir HSA Market

Survey revealed that 26% of all HSA dollars contributed to an account came from an employer, for an average employer contribution of $867.

If your employer doesn't offer an HSA or you prefer to go out on your own, you can find HSAs at banks and other financial institutions. Brokerage firms are another place to open an HSA, especially if you prefer to invest your HSA funds in stocks, bonds, or ETFs. Your HSA provider may charge a monthly fee for managing your account.

4. Reimburse yourself

One of the most important things you can do to take full advantage of an HSA is to save receipts for qualifying medical expenses. You can get reimbursed now for medical expenses paid out of pocket. You can also save the receipts and allow your HSA to grow tax-free for the foreseeable future. That's because HSAs carry no time limits on when you can seek reimbursement.

You could save every receipt for qualifying expenses for decades and then get reimbursed after those funds have enjoyed years of tax-free growth. Reimbursements must be for qualifying medical expenses. For guidance on which medical expenses count and which ones don't, head to IRS Publication 502.

Is an HSA right for you?

HSAs can be a great savings and retirement vehicle for those who qualify. Even then, it may not be right for you if it means having to pay a higher deductible before insurance benefits kick in.

Check for any HSA fees or investment costs before choosing an HSA. Consider your financial situation and current and future health needs to determine if opening an HSA makes sense for you.