Health Savings Accounts (HSAs) are a great way to save on healthcare costs and grow your money tax-free - but only if you set them up correctly. Here’s what to watch out for:

1. Check Your Health Plan: Only High Deductible Health Plans (HDHPs) qualify for HSAs. Confirm with your provider or HR.

2. Know Contribution Limits: For 2024, individuals can contribute up to $4,150 and families up to $8,300. Avoid penalties by staying within these limits.

3. Follow Transfer Rules: Direct transfers are safer than rollovers, which have strict deadlines and limits.

4. Invest Wisely: Don’t leave all your HSA funds in cash. Consider investing for long-term growth while keeping enough for expenses.

5. Name Beneficiaries: Designate beneficiaries to avoid tax issues and ensure your funds go where you want.

Quick Reference: 2024 HSA Contribution Limits

| Coverage Type | Contribution Limit | Catch-Up (55+) |
| --- | --- | --- |
| Individual | $4,150 | +$1,000 |
| Family | $8,300 | +$1,000

By avoiding these mistakes, you can maximize your HSA’s benefits and avoid unnecessary penalties.

Common Mistakes to Avoid With Your Health Savings Plan

1. Check If Your Health Plan Is Eligible

Not all health plans make you eligible for an HSA. To qualify, you need to be enrolled in a High Deductible Health Plan (HDHP).

Here’s how to confirm your plan's eligibility:

• Talk to your HR department or insurance provider: They can tell you if your plan meets the requirements.

• Review your plan documents: Look for terms like "HSA-eligible" or "HSA-compatible."

Once you confirm your plan qualifies, managing your HSA becomes easier. Tools like Reimbursable can help you keep track of expenses and simplify tax filing.

2. Know Your Annual Contribution Limits

Getting your HSA contributions right is key to maximizing tax benefits. Missteps here can throw off your entire savings plan.

Here are the 2024 IRS contribution limits:

| Coverage Type | Annual Contribution Limit |
| --- | --- |
| Individual | $4,150 |
| Family | $8,300 |
| Age 55+ Catch-up | Additional $1,000

Going over these limits can be expensive. The IRS imposes a 6% penalty on excess contributions every year. For instance, if you overcontribute by $500, you’d face a $30 penalty annually until corrected.

Tips to avoid overcontributing:

• Keep tabs on all HSA contributions and set alerts to stay within IRS limits.

• Factor in employer contributions and adjust your own accordingly.

• If you overcontribute, withdraw the excess and any earnings by the tax deadline to sidestep penalties.

Using tools like Reimbursable can help you stay on track and make the most of your HSA’s tax advantages.

3. Follow HSA Transfer Rules Carefully

Making mistakes with HSA transfers can lead to penalties and headaches. Following the right process ensures you keep your tax-advantaged status intact.

Two HSA Transfer Methods

There are two main ways to transfer funds between HSAs:

| <strong>Transfer Type</strong> | <strong>Key Features</strong> | <strong>Time Limits</strong> | <strong>Annual Restrictions</strong> |
| --- | --- | --- | --- |
| <strong>Direct Transfer</strong> | Funds move directly between banks | No time limit | Unlimited transfers allowed |
| <strong>Rollover</strong> | Funds sent to you first | 60 days to redeposit | Limited to one per year

Direct Transfer Tips

Direct transfers are the easiest and safest choice. Your current HSA provider sends funds directly to your new provider, avoiding risks like missed deadlines or mismanagement. Most major providers handle these transfers electronically, typically completing them within 5–7 business days.

Rollover Rules to Remember

If you choose a rollover, stick to these rules to avoid penalties:

• Deposit the funds into your new HSA within 60 days.

• Keep clear records of the withdrawal and deposit dates.

• Ensure you haven’t done another rollover in the past 12 months.

• Deposit the exact amount you withdrew - no more, no less.

IRA-to-HSA Transfers

You can also transfer funds from an IRA to an HSA in a one-time process called a qualified HSA funding distribution (QHFD). Here’s what you need to know:

• The transfer cannot exceed your annual HSA contribution limit.

• You can only do this once in your lifetime.

• You must stay HSA-eligible for 12 months after the transfer.

Avoid These Common Mistakes

Be careful to steer clear of these errors:

• Missing the 60-day deadline for rollovers.

• Trying to do more than one rollover in a 12-month period.

• Failing to keep proper documentation of your transactions.

• Exceeding contribution limits by combining transfers with regular deposits.

Using tools like Reimbursable can help you stay organized. Their receipt storage feature is especially handy for keeping track of transfer documentation and staying compliant with IRS rules.

Up next, we’ll dive into HSA investment options to help you make the most of your account.

4. Consider HSA Investment Options

A lot of HSA holders leave their funds sitting in cash, missing out on the chance for tax-free growth. Looking into investment options could help you maximize your HSA's potential.

Balancing Cash and Investments

Keep enough cash in your HSA to cover immediate medical expenses, but think about investing any extra funds for long-term growth. Another tip? Hold off on reimbursing yourself for documented medical expenses. This gives your investments more time to grow tax-free.

The Importance of Record-Keeping

If you're focusing on growing your HSA through investments, keeping detailed records of qualified medical expenses is a must. Tools like Reimbursable can simplify this process. According to Reimbursable:

"Reimbursable helps maximize the wealth-building capabilities of your HSA account, letting your money grow tax-free over time with peace of mind that your out-of-pocket expenses are tracked."

Good record-keeping supports both short-term expense tracking and long-term investment strategies.

Mistakes to Watch Out For

• Not investing at all, which can limit your growth opportunities.

• Forgetting to keep enough cash on hand for immediate medical costs.

• Failing to maintain proper records, which can complicate future reimbursements.

Why Tax-Free Growth Matters

HSAs come with three major tax perks: contributions are tax-deductible, growth is tax-free, and withdrawals for qualified expenses are also tax-free. These benefits can make a big difference in your overall investment strategy.

5. Name Your HSA Beneficiaries

Not naming beneficiaries for your HSA can lead to unexpected tax issues. Here's how to select and update them effectively.

Spouse vs. Non-Spouse Beneficiaries

What happens to your HSA after you pass away depends on who inherits it. If your spouse is the beneficiary, they can take over the account and keep all its tax benefits. For non-spouse beneficiaries, the account's HSA status ends, and its fair market value becomes taxable in the year of your death.

| Beneficiary Type | Tax Treatment | Account Status |
| --- | --- | --- |
| Spouse | Tax-free transfer | Retains HSA status |
| Non-spouse | Taxable as income | Converts to taxable |
| No beneficiary | Added to estate | Subject to probate

Updating your beneficiaries regularly ensures your HSA benefits go where you intend.

When to Review Beneficiary Designations

It's a good idea to check and update your beneficiary designations during major life events, such as:

• Marriage or divorce

• Birth or adoption of a child

• Death of a current beneficiary

• Changes in significant relationships

Managing Beneficiary Designations

Keep your beneficiary details up to date to avoid any tax complications. Adding backup beneficiaries can also help prevent your HSA from defaulting to your estate. Keep in mind that your beneficiary designation form takes priority over your will.

Most HSA providers allow you to update beneficiaries online, though some might require notarized documents. Always keep a copy of your updated forms for your records.

Making sure your HSA beneficiaries are correctly designated protects your account's tax benefits and aligns it with your estate plan. For personalized advice, consider consulting a financial advisor or tax professional.

Conclusion

Setting up your HSA the right way is key to making the most of its growth potential and avoiding unnecessary pitfalls. Start by confirming that your health plan qualifies, understanding contribution limits, following transfer rules, considering investment options, and naming the right beneficiaries. These steps help ensure your HSA becomes a powerful tool for your financial future without unnecessary complications.

An efficiently managed HSA not only grows tax-free but also helps cover medical expenses. Keeping detailed records is essential for reimbursements and staying prepared for IRS audits. Tools like Reimbursable can simplify this process by automating expense tracking and making your HSA easier to manage.

"Reimbursable helps maximize the wealth-building capabilities of your HSA account, letting your money grow tax-free over time with peace of mind that your out-of-pocket expenses are tracked."

To get the most out of your HSA, maintain accurate records of eligible expenses, securely store documentation, and review your strategy each year. By steering clear of the setup mistakes discussed in this article, you'll be better positioned to achieve long-term success with your health savings plan.

Related Blog Posts

• HSA Form 8889: IRS Guide 2024

• HSA Tax Benefits: 3 Ways to Save Money

• HSA-Eligible Dental Services Guide 2024