2 Ways to Make the Most of Your HSA

If there's one bad thing to say about health savings accounts, or HSAs, it's that not everyone is eligible for one. To participate in an HSA, you need a compatible high-deductible health insurance plan.

But aside from that restriction, HSAs are pretty awesome. They give you a tax break on your contributions, allow you to invest unused funds tax-free, and offer tax-free withdrawals on qualifying medical expenses.

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You should also know that with the right strategy, an HSA can double as a powerful long-term savings vehicle. Here are two ways to get the most out of your HSA.

1. Don't forget about catch-up contributions

If you have an IRA or 401(k), you may be familiar with catch-up contributions, which start once you turn 50. HSAs offer catch-up contributions as well -- only they start at age 55, not 50.

You might think that HSA catch-ups aren't so meaningful because they're only worth $1,000 a year. But remember, you may end up contributing to an HSA for another decade (or more) before enrolling in Medicare. Not only can those $1,000 catch-ups add up, but they can also gain value as you invest that extra money.

2. Leave your HSA untouched as long as possible

Many people treat their HSAs like a checking account. When medical bills come up, they dip into their balances to cover them.

A better way to use an HSA, though, is to pay for medical expenses as you go and leave your HSA balance alone. There's no deadline for using up an HSA. If you start funding one in your 20s or 30s and reserve that money for retirement, by the time you reach that point, you could have a sizable balance.

This approach can be especially valuable given that healthcare costs tend to rise in retirement. If you're able to accumulate a nice balance, that's one less stressful thing to worry about paying for.

And remember, if you happen to end up in a situation where your healthcare costs in retirement aren't all that high, you can use your HSA like a traditional 401(k) or IRA starting at age 65. At that point, you won't be penalized for non-medical withdrawals -- you'll just have to pay taxes on them.

An HSA gives you the flexibility to spend your money on qualifying healthcare bills as you wish. But it's important to make the most of your account by adding extra funds starting at 55 and leaving that money untouched as long as possible. Entering retirement with a robust HSA balance could help you approach that stage of life with a lot more confidence.

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