Healthcare

Three HSA Mistakes to Avoid

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by Alli Thomas

Sep 17, 2020

Do you or your spouse have a Health Savings Account (HSA)?

We’ve talked about the benefits they offer before. If you’re nearing retirement, here are three things that you’ll want to avoid if you’re trying to maximize the benefits of these savings accounts:

 

1. Not Buying Insurance With Your HSA

Sure, you can use the funds in your HSA to pay for qualified medical expenses—think co-pays and vision and dental expenses— but if you use HSA funds to pay for qualified medical costs, you won’t be able to claim those costs as itemized deductions.

Instead, you can also use your HSA to pay for certain insurance premiums. These include COBRA premiums, long-term care insurance premiums, and, if you’re 65 or older, Medicare. However, Medigap premiums are NOT eligible expenses.

 

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2. Being Penalized Through Retroactive Social Security enrollment

If you wait until you reach full retirement age to claim your Social Security benefit, you’ll be given a choice to receive a lump sum of retroactive benefit that dates back six months.

But wait! If you choose to take that lump sum, that means you also have chosen to sign up for Medicare retroactively. And that may be a problem if you’ve been making regular HSA contributions–because you can’t do both. Contributing to your HSA while enrolled in Medicare leads to excess contributions.

If this happens, you’ll need to withdraw the amount of excess contribution you’ve made before Tax Day, and they will be included in your taxable income, OR you’ll pay a 6% excise tax for every tax year the excess contributions remain in your account. Ouch.

 

3. Using Your HSA to Pay for Non-Medical Expenses

If you withdraw money from your HSA for non-qualified medical expenses before you turn 65, be prepared to pony up 20% for the withdrawal penalty, which is more than the 10% early withdrawal penalty from IRAs and 401(k) plans. You’ll pay the penalty PLUS regular income taxes on the withdrawn amount.

If you’re over 65, you’ll still have to pay income taxes on non-qualified HSA withdrawals, but you won’t have to deal with the 20% penalty.

Even with these restrictions and caveats, the HSA is an incredible retirement planning tool. If you’d like to learn more about how it can fit into your financial plan, click here to set up a free call with one of our advisors.

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Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k) administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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