3 Things About HSAs Too Many People Get Wrong

There's a reason retirement accounts like IRAs and 401(k) tend to get a lot of glory. These accounts offer big tax breaks for savers that are hard to beat.

With a traditional IRA or 401(k) plan, your money goes in on a pre-tax basis, and investment gains are tax-deferred. This means you don't pay taxes on those gains until you take withdrawals from your account.

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With a Roth IRA or 401(k), contributions go in on an after-tax basis. But investments gains in a Roth account are tax-free, and withdrawals are tax-free as well.

There's one lesser-known type of savings plan that combines the benefits of traditional and Roth retirement accounts -- the health savings account, or HSA. So if you're eligible to participate in one, it typically pays to.

But there's a lot of misinformation about HSAs that may prevent you from opening or maximizing one. Let's clear up three big misconceptions that far too many people tend to buy into.

1. You have to use up your balance every year

Many people are familiar with flexible spending accounts, or FSAs, which allow you to set aside pre-tax dollars for near-term medical expenses. It's true that FSAs typically require you to use up your plan balance each year or otherwise risk forfeiting your money. But HSAs work differently.

HSA funds do not come with a yearly expiration date like FSA funds. In fact, with an HSA, you're actually encouraged not to withdraw your money right away, since you can invest it and enjoy tax-free growth.

A good strategy, in fact, is to try to cover your near-term medical bills by budgeting for them carefully so you can reserve your HSA dollars for retirement. That gives your money more time to grow and could set you up with a nice sum of cash at a time when your personal healthcare spending might increase.

2. You'll lose your HSA if you switch jobs or insurance

It's common to open an HSA through your employer. And some companies even make HSA contributions on workers' behalf.

But you should know that your HSA is not tied to your job the same way FSAs are. If you leave your job, you get to take that money with you.

Similarly, the ability to contribute to an HSA hinges on being enrolled in a high-deductible health insurance plan that meets the right criteria. If you switch insurance plans, you may no longer be eligible to fund an HSA if your new plan is not compatible with one. But that doesn't mean you lose the existing money in your HSA.

3. You can't use your HSA once you're on Medicare

You may have heard that once you enroll in Medicare, you're barred from participating in an HSA. And it's true that HSA contributions are off the table for Medicare enrollees.

However, you can absolutely use an existing HSA to cover qualifying healthcare expenses once you become a Medicare enrollee. You just can't add money to your account.

Some of the expenses you can use an HSA for include:

• Dental care, which original Medicare doesn't cover
• Eye exams and glasses, which original Medicare doesn't pay for
• Hearing aids, which are generally not a Medicare-covered expense
• Copays and coinsurance for things like prescriptions, diagnostic tests, and durable medical equipment
• Medicare premiums, including premiums for Part B, Part D, or Medicare Advantage

The more you know about how HSAs work, the more you can take advantage of these fantastic savings plans. Make sure to learn the rules of HSAs, and don't let the misconceptions above stop you from opening one if you qualify based on your health insurance plan.

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