3 Big Health Savings Account (HSA) Mistakes You Don't Want to Make

Healthcare is an expense everyone has to deal with. It doesn't matter if you're 25, 47, or well into retirement. At some point, medical bills are apt to come your way, and you're going to have to dip into your cash reserves to cover them.

It's for this reason that it makes sense to contribute to a health savings account, or HSA, if you're enrolled in a high-deductible health insurance plan that's compatible with one.

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The nice thing about HSAs is that they're triple tax-advantaged. Your money goes in on a pre-tax basis, investment gains in your account are tax-free, and withdrawals are tax-free provided that money is used to pay for qualifying healthcare expenses.

But if you're going to participate in an HSA, it's important to know the rules and manage your money carefully. Here are three big HSA mistakes you don't want to make.

1. Withdrawing your money right away

HSAs are very flexible with regard to withdrawals. You can remove funds at any time to cover a qualifying healthcare expense, and your money will also never expire.

But one mistake you don't want to make is tapping your HSA right away if you don't have to. This blunder could actually come back to bite you in a couple of ways.

For one thing, any money you withdraw from your HSA immediately is money you then can't invest. That means not only missing out on gains, but tax-free gains.

The other problem is that come retirement, you might really need the money in your HSA to cover your healthcare costs. Not only are they likely to be higher in retirement, but your income may be limited at that point to a combination of Social Security and savings. So the more funds you have left over in your HSA, the better.

This isn't to say that you should rack up medical debt and pay interest on it when you have money sitting in an HSA. But if you can afford to pay some of your near-term medical bills without tapping your HSA, then it's generally wise to do that and save the money for when you might need it the most.

2. Continuing to fund your account after enrolling in Medicare

Once you turn 65, you'll typically be eligible for Medicare. But one thing you don't want to do is continue funding your HSA once you become a Medicare enrollee.

Medicare enrollment disqualifies people from being HSA participants. If you continue to contribute, you'll face a penalty on the money you put in.

That said, while you can't contribute to an HSA while on Medicare, you can use existing HSA funds to cover healthcare expenses you face as a Medicare enrollee, such as copays, deductibles, and coinsurance.

3. Assuming you can only use the money for healthcare expenses

Because there can be costly penalties for taking HSA withdrawals for non-medical purposes, you may be inclined to err on the side of underfunding your HSA. After all, you don't want to end up in a situation where you'd older and have a large HSA balance you can't finish using.

But one thing you should realize is that once you turn 65, the rules of HSAs get a lot more loose. From that point onward, non-medical HSA withdrawals are not penalized.

So let's say that come age 65, you realize your HSA balance is huge. You could take a $5,000 withdrawal to pay for a vacation without having a penalty to worry about.

Now in that situation, you would be looking at a tax bill on your withdrawals. But that's no different than having savings in a traditional IRA or 401(k).

Unless you have a Roth retirement plan, the money you remove from your savings will be taxable. So that shouldn't be a deterrent to maxing out an HSA if you have the ability to do so.

HSAs are one of the best savings tools available. If you qualify to participate in one, make sure you know the rules inside and out so you don't make a mistake you later regret.

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