If You're Doing This With Your HSA, You're Making a Huge Mistake

There's a reason retirement savers are often quick to take advantage of accounts like IRAs and 401(k). These accounts offer different tax breaks, making it easier to set money aside for the future.

But IRAs and 401(k)s aren't the only accounts that offer tax savings. Health savings accounts, or HSAs, are another tax-advantaged tool it pays to sign up for if you qualify.

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HSAs are accounts that help you save for healthcare costs. Eligibility hinges on being enrolled in a high-deductible health insurance plan, and the definition of that changes from year to year.

What makes HSAs so valuable is that they offer three distinct benefits:

• Tax-free contributions.
• Tax-free investment gains.
• Tax-free withdrawals.

But if you mishandle your HSA, you could end up losing out on one of those tax breaks in a very big way.

Don't rush to tap your HSA

The nice thing about HSAs is that they're extremely flexible. Once money hits your account, you can take withdrawals at any time to cover qualifying medical bills.

At the same time, there's no expiration date on HSA funds. Unlike flexible spending accounts, you do not have to use up your plan balance by a certain deadline each year.

In fact, HSA savers are actually encouraged to let their balances grow, since investment gains in these accounts are tax-free. So the longer your money goes untouched, the larger a sum it might grow into.

For this reason, it's actually not a great idea to raid your HSA every time a medical bill comes up if you can afford to cover those costs another way. If you continuously dip into your HSA, you may not leave yourself with much money to invest.

In fact, if you're able to, a good bet is to fund an HSA during your working years but save your entire balance for retirement. Healthcare is one of the biggest expenses retirees today face, so having a dedicated account to cover that cost later in life could alleviate a lot of stress.

Plus, if you start funding an HSA in your 20s or 30s and you don't touch your balance until your 60s, you could end up growing your money substantially.

Use your HSA strategically

If you can't afford to contribute to an HSA and also cover near-term medical bills with separate funds, then it still pays to contribute to that account and dip in when you need to. But if you have the flexibility to leave your HSA alone in the near term, definitely do so.

If you're able to carry a nice HSA balance into retirement, it could take the pressure off at a time when money may be tight. And even if you don't manage to reserve those funds for retirement, the longer you're able to invest your HSA, the more you stand to benefit.

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