Maybe it was your financial advisor who first recommended opening an Health Savings Account (HSA), or maybe you heard the buzz about the account’s triple tax advantage. Regardless of your reasons, it’s not enough just to have an HSA. In order to maximize your account’s benefits, you need to use it the right way.

That includes following these top five healthy HSA habits:

1. Maxing out your contribution limits
2. Matching your employer’s contribution
3. Using your HSA towards your insurance deductible
4. Using FSA funds first
5. Saving HSA funds for retirement

How people use their accounts incorrectly

Unless you’re under the age of 65 and using your HSA contributions to pay for expenses that aren’t considered “qualified medical expenses” then you’re not using your HSA “incorrectly” per se. But there are some habits in which people engage that prevent them from realizing the full benefit of their account.

Using their HSA money for small eligible expenses. Even if an expense is considered “qualified” that doesn’t mean you should spend your HSA money to purchase it. A good rule of thumb is, if you can comfortably pay for any out-of-pocket medical expense without using your HSA, even if it means cutting down a little bit on discretionary spending, that’s the right thing to do.

Since HSA balances roll over from year-to-year, and you can invest your contributions in the market, it pays to leave as much money in your account as possible. Here is a chart from NYU that shows the annual returns of stocks, bonds and T-bills from 1928-2021. You can see that every year the returns are different, and they aren’t always positive. But if you invested your money in the S&P 500 over the last 10 years, you would have received an average annual return of 14.41%.

The only time it makes more sense to use your HSA to pay for out-of-pocket expenses is when you would otherwise have to use a credit card and carry a balance. Since interest rates on credit cards can be as high as 24% or more, it’s usually smarter to use your HSA than carry a balance.

Limiting your annual contributions to your estimated out-of-pocket expenses. Like we said above, your HSA balance rolls over from year to year and the more money you have in your account, the faster it grows (especially if you’re investing it). Your HSA provides you with an opportunity to save for future emergencies that you can’t estimate because they are “unforeseen” by nature. To put yourself in the best position possible when those emergencies arise, you should contribute the maximum your budget allows, up to IRS annual limits.

Five healthy HSA habits

Now that we’ve told you what not to do, here are the top five, financially healthy, habits that will enable you to maximize the benefits of your HSA account.

Max out your contribution limits

The best way to fully optimize the benefits of your HSA is to max out your contributions. By “max out” we mean, you contribute as much as both your budget and the IRS allows. The IRS sets the limit each year for the amount High Deductible Health Plan (HDHP) participants can contribute to their account. Your limit is dependent upon whether you have an individual health plan or a family plan. If you have an individual plan but use your HSA to help pay for dependents’ healthcare, you’re still subject to the “individual health plan” limit.

If contributing this much to your HSA would put too big a strain on your budget, another goal could be to contribute up to the amount of your deductible. That way, you have enough to cover out-of-pocket costs until your insurance carrier’s cost-sharing kicks in.

If this is still too much, contribute the maximum you can afford without carrying a balance on your credit card and while still meeting other financial goals like contributing to your other retirement accounts like a 401k.

Match your employer’s contributions

Employers have different policies around contributing to employees’ HSAs. If your employer has a policy in place to match your contributions up to a certain amount, contributing less would be leaving money on the table. Also, many employers incentivize employee participation in wellness initiatives by rewarding them with deposits into their HSAs. Maximizing the benefits of your HSA means maximizing the money your employer is willing to give you for (sort of) free.

Use your HSA towards your insurance deductible and premium

One way to safeguard against unexpected medical costs throughout the year is to use your HSA to pay for your deductible. If you have enough in your account at the beginning of the year, because you’ve either made a large deposit or have been able to save more than you spent in previous years, it might be smart to use your money to pay your deductible upfront.

High deductible health plans (HDHPs) cover preventative care before you meet your deductible, but if you or your dependents get sick, you might be responsible for higher out-of-pocket costs than you were anticipating. But if you pay your deductible up front, you’re only responsible for co-pays, coinsurance and the other cost-sharing policies for your plan.

While you’re employed, you’re prohibited from using your HSA to pay for your health insurance premium. But that changes once you lose your job. If you’re unemployed and choose to continue paying for your previous employer’s health plan through COBRA, you can use your previous HSA contributions to pay for your premium. You can also continue contributing to your HSA through COBRA; those contributions just won’t get the same tax break they did while you were employed. You can also use your HSA to pay for your health insurance premium if you buy a plan in the private market while on unemployment.

Use FSA funds first

While FSAs and HSAs seem like they serve the same function, there is one major and material (to this conversation) difference: FSAs do not roll over at the end of the year. Unlike with HSAs, if you have unused funds in your FSA left over at the end of the year, you forfeit them. Your employer can choose to give you a 2 ½ month grace period or allow you to roll over up to $500 to the following plan year, but they don’t have to.

Since your HSA money never expires, if you have both a limited purpose or dependent care FSA and an HSA, you should use your FSA money first. Once your FSA has been depleted, then and only then, should you tap into your HSA.

Take HSA funds to retirement

Three characteristics of HSAs make them ideal retirement savings vehicles:

1. Your money rolls over from year to year, compounding on itself.
2. You can invest your savings.
3. The account comes with a triple tax advantage: your contributions are tax-free in the year they’re made (unless you make them through COBRA), they grow tax free and as long as you use them for qualified medical expenses, the distributions are tax free as well. Once you turn 65 you can use your HSA money on whatever you’d like but any distributions used for non-qualified medical expenses will be subject to the appropriate income tax.

Now, that you know you should take your HSA with you into retirement, we’ll tell you how to use your money.

1. To pay for health insurance if you retire before age 65. At age 65 you become eligible to buy health insurance through Medicare. But if you’re lucky enough to retire before that age, you can use your HSA to pay for COBRA or private insurance premiums until you qualify.
2. To pay for Medicare insurance premiums including parts B + D for prescription drugs.
3. To pay for long-term care insurance. Your HSA can be used to pay for a tax-qualified long term care insurance policy. Medicare does not cover long term care so it might be something you want to plan for if you don’t have another plan for your later years should you not be able to care for yourself. You can open one of these policies at any time but the price increases the older you get.
4. To pay for everyday expenses. Once you turn 65, your HSA functions like any other retirement account with one exception. Like your IRA or 401k, you can use your HSA money to pay for anything from food, housing and clothes to healthcare expenses. The difference is, if you use your HSA to pay for qualified medical expenses after age 65, your disbursements remain tax-free. If you use your IRA or 401k to pay for these same expenses, you will be subject to the appropriate income tax rate.

Getting started with Lively

Want an HSA that makes it easy to save but also invest those savings? Then you want a Lively HSA. With both Guided Portfolio and Self-Directed options, every investor can find the tailored portfolio mix to meet their needs. Lively also has no minimum cash requirement so you can keep as much of your money invested as you want, growing your savings faster to maximize your account benefits and reach your financial goals.