Health Savings Accounts (HSAs) are one of the best financial tools out there—offering tax advantages and long-term growth potential. But unfortunately, most people don’t use them to their full potential, and some make mistakes that cost them serious money. Heck, I could have easily made the mistake with my own family’s medical expenses.

Last year, my daughter had a major jaw surgery (which, as a father, was both emotionally and financially painful). My first inclination was to use some of the funds we had saved up over the past 10+ years. It would have been easy to use our HSA to cover the cost immediately—but instead, I kept the receipts and paid out-of-pocket. Why? Because someday, when I’ve likely predeceased my wife (thanks to my bad knees, statistical likelihood, and general refusal to ask for directions), she’ll be in a higher tax bracket. By holding onto those records, she can withdraw from the HSA tax-free in retirement, when it’ll matter more.

So, in the spirit of learning from my own near mistakes, here are the biggest blunders we see clients make with HSAs and how to avoid them:

1) Not Contributing Enough (Or at All)    

Health Savings Accounts have a triple tax advantage:

• Tax-deductible contributions (lowers your taxable income)
• Tax-free growth (investments inside the HSA grow without Uncle Sam taking a cut)
• Tax-free withdrawals (when used for qualified medical expenses)

Despite these benefits, many people don’t contribute enough—or at all. Why? Often times people treat them like a Flexible Spending Account (FSA), and they don’t realize HSAs are more than just a way to cover this year’s medical bills. Instead, they should be viewed as a stealth retirement account.

Fix it:

• Set up automatic contributions so you don’t forget.
• Treat your HSA like a long-term investment rather than a piggy bank for doctor’s visits.

2) Letting the Money Sit in Cash

Most HSA providers let you invest your balance, but too many people leave their funds sitting in cash earning much less over the long term. This happens more frequently than you might think simply because your work HSA plan may require you first to accumulate and hold a minimum amount of cash (I frequently see a requirement of $1,500 or more). If your goal is long-term growth, your money should be working for you.

Fix it:

• If your provider allows it, invest a portion of your HSA balance similar to the long-term investments held in your other retirement accounts.
• If needed or required, keep some cash for short-term medical expenses but invest the rest with a long-term horizon.

3) Bad (aka no) Record-Keeping

HSAs are only tax-free if used for medical expenses. But if you’re audited and can’t prove your withdrawals were qualified, prepare for penalties.

Fix it:

• Digitally save all receipts for medical expenses you pay out of pocket.
• Use an app or simple spreadsheet to track your spending (so your future self—or spouse—knows how much you can withdraw tax-free).

4) Withdrawing Too Early

This is where my daughter’s jaw surgery comes in. Most people assume they should use their HSA funds now for medical expenses. But there’s no rule saying you have to withdraw money immediately. If you can afford to pay out-of-pocket and keep your receipts, you can wait years—even decades—to pull the money out tax-free.

Why does this matter?

• Your HSA funds keep growing tax-free.
• You can reimburse yourself in retirement, when you may need the money more.
• If your spouse ends up in a higher tax bracket after you’re gone (very likely), withdrawing in retirement could save money via through taxes.

The Bottom Line

HSAs are an incredible wealth-building tool, but more so if you use them wisely. Contribute as much as you can, invest the funds, pay out of pocket for as many health costs as possible, keep meticulous records, and don’t be too quick to pull money out. Your future self—and maybe your surviving spouse—will thank you.

If you’d like to learn more about Health Savings Accounts, please reach out and we’ll be happy to provide more detailed information.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those Rob Hrnicek and not necessarily those of Raymond James.

Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Investing involves risk and you may incur a profit or loss regardless of strategy selected