Don’t Make These Costly Mistakes with Your Health Savings Account
Editor’s note: Do you have a Health Savings Account? If so, guest contributor Jason Steele has a few tips for you when it comes to your contributions, rules using the account and health savings account taxes – all learned from his personal experience.
Health Savings Accounts (HSAs) are a great way to help ease the pain of costly medical bills that are not covered by insurance. These accounts are available to people with high deductible medical insurance plans and can be used to fund unreimbursed medical expenses with tax-deductible savings.
While this is a very valuable benefit, it can also be somewhat confusing. Ultimately, taxpayers may miss out on thousands of dollars worth of deductions when they make some of the following mistakes.
- Forgetting that HSA contributions can be made until the tax deadline of the following year. One of the great things about HSAs is that contributions can be made retroactively for the previous tax year before the federal tax deadline. So those who were unaware of HSAs can still claim the tax benefit for the previous tax year by setting up an account and making a contribution, so long as they held a high deductible health care policy. Then, HSA participants just need to submit their medical bills for reimbursement.
- Not considering HSA contributions can be rolled over. HSA funds can also be used for reimbursable medical expenses incurred in the current and subsequent years. This means that someone who has incurred a large medical bill can essentially make two years’ worth of contributions to their HSA to pay for it, if they do so in time. In addition, those planning an elective medical procedure in the future can double their maximum HSA contribution before the tax deadline by applying it to two tax years.
- Making ineligible purchases with your HSA debit card. Non-medical withdrawals from an HSA account must be reported to the IRS and are subject to a 20% penalty. So don’t ever use these funds to buy a big screen television or to take a vacation!
- Confusing HSAs with employer sponsored FSAs. When people are accustomed to using their employer’s Flexible Spending Account (FSA), they might assume that their HSA works the same way. In fact, HSA plans allow the full account balance to be carried over to the next year, unlike a FSA where contributions largely work on a “use it or lose it” system where only $500 may be rolled over to the next tax year, and any funds over that amount are forfeited. In addition, employer sponsored FSAs require participants to specify a deduction to be made from each month’s pay check. But with HSA plans that are not employer-sponsored, account holders can make lump sum payments any time they choose.
By avoiding these classic mistakes, you and your family can use the valuable HSA benefit to significantly reduce the cost of your medical expenses.
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