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Plan Well, Retire Well

Health Savings Accounts: Ten Things to Do and Not Do

My husband is contributing to a Health Savings Account (HSA), so of course I wanted to learn all the in's and out's of this relatively new animal. If this is new to you, check out the benefits and who qualifies in last month's post.

If you take a few moments to learn the rules, you can reap significant benefits for you and your family members while avoiding the miss-steps that would incur taxes and perhaps penalties.

In many ways, HSAs operate like IRAs but for medical expenses. Keep that similarity in mind, and you'll quickly grasp many of the ways to get the most out of your HSA.

After a lot of reading, here's my list of things that are OK to do with an HSA, and thing I shouldn't do.


  1. You can open an HSA account on your own, with a mutual fund company or a bank, for example, that offers this type of account. You'll make contributions directly to the account and deduct them on your income taxes. Or, you can use the account offered through your employer; contributions made via payroll deduction or by your employer will be pre-tax. (See previous post for more details on tax benefits.)
  2. You can use money in the HSA to pay for health expenses of a spouse or dependent even if your insurance policy only covers you.
  3. Save or spend, it's your choice. Unlike flexible spending accounts, there's no annual deadline for using the money or submitting expenses for reimbursement. You can use your HSA as a short-term holding place to reimburse yourself for out-of-pocket medical expenses on an as-you-go basis, or accumulate money in the account and let its tax-exempt returns compound for years. Your HSA may stipulate that your balance, up to a certain amount, has to be in a basic savings account. If you accumulate more money than that, you'll be allowed to move the additional funds into investments such as mutual funds.
  4. Rollovers from one account custodian to another can be made at any time, even from your employer plan while you're still working. Just watch the minimum balance needed in the account to avoid fees. If you don't like the investment choices in your employer-provided HSA account but need to keep some money in it, you can do a partial rollover of the additional funds to a financial custodian of your choice.
  5. Did your insurance change during the year? Check IRS Publication 969 to see if you qualify to contribute the full amount to your HSA.
  6. Contributions can be made until April 15 of the following year. However, in an employer plan you may not be able to control for which year contributions from January 1 to April 15 are counted.

Don't Do:

  1. Don't make any more contributions once you're covered by Medicare. That's not allowed.
  2. Don't use the money for anything except qualified medical expenses. Distributions used for anything else will be taxed and – unless they are made after you reach age 65, are disabled, or die – you'll pay an additional 20% penalty tax. So even if you're saving the money and letting it grow rather than taking reimbursements along the way, save all your receipts for qualified medical expenses and the insurance statement (aka Explanation of Benefits or EOB). You can use them to request reimbursement in the future.
  3. Don't die with money in your HSA. If you leave the account to anyone other than your spouse, the entire amount will be taxable income to your beneficiary or your estate in the year of your death. They can subtract any of your remaining qualified medical expenses that they pay within one year of your death, but any additional money is taxed. That can be an unpleasant surprise to your heirs. So name a beneficiary, but plan to spend the money in the account while you and your spouse are still living.
  4. If you are married, the obvious choice for your primary beneficiary is your spouse, because your tax benefits can extend to your spouse. Just as with an IRA, the surviving spouse can treat the account as her own and use the money for her own qualified medical expenses tax-free. But if your spouse pre-deceases you, someone is getting a tax bill along with the balance in your HSA.