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Health Savings Accounts (HSAs) offer tax advantages for medical expenses, but mistakes can lead to penalties or loss of benefits. Understanding common errors can help you maximize your HSA and avoid costly issues.
Contributing Beyond the Limit
One of the most common mistakes is exceeding the annual contribution limit set by the IRS. Over-contributing can result in a penalty of 6% on the excess amount each year until it is withdrawn or corrected. It is important to track contributions carefully and adjust if necessary.
Using Funds for Non-Qualified Expenses
HSAs are intended for qualified medical expenses. Using the funds for non-qualified expenses before age 65 incurs income tax and a 20% penalty on the amount withdrawn. After age 65, non-qualified withdrawals are taxed as income but do not have the penalty.
Failing to Keep Proper Records
Maintaining detailed records of medical expenses is essential. Without proper documentation, the IRS may disallow deductions or impose penalties if audited. Keep receipts, statements, and explanations for all HSA-related expenses.
Not Monitoring Account Changes
Changes in IRS rules, contribution limits, or your personal circumstances can affect your HSA. Regularly reviewing your account and staying informed about updates can prevent mistakes and ensure compliance.