How to Manage HSA Expenses
An individual who opens a Health Savings Account (HSA) is responsible for managing the account. This includes making and tracking contributions and deductions. It also involves making investing decisions. Effectively managing HSA expenses can help the account owner maximize potential tax advantages while increasing the savings and investment earnings.
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Instructions
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Before opening an HSA, compare potential fees among banks, credit unions and other institutions that offer HSAs. Ask how fees are determined, when they apply and how often. Otherwise, HSA tax advantages, savings and investment growth may be partially offset by fees.
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Be sure to understand and comply with HSA rules and limits. For example, to reap the tax advantages of an HSA, you must be covered by a HSA-qualified High-Deductible Health Plan (HDHP) before contributing to the account. In addition, the HSA owner is solely responsible for tracking contributions to avoid exceeding annual limits set by the Internal Revenue Service. Failing to comply can result in tax penalties or the loss of HSA tax advantages.
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Make sure a medical expense is eligible for HSA reimbursement. Otherwise, a tax penalty may apply. In general, if an expense primarily prevents or alleviates an illness, it may be permitted under federal tax law. A partial list of eligible expenses is in IRS Publication 502, available at the IRS's website (www.irs.gov). Also, keep receipts in case of an audit.
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Tips & Warnings
Keep a ledger tracking contributions and deductions, just like a regular checking or savings account. Also, ask the institution offering the HSA about any special tools it may offer to help track contributions, deductions and fees.
HSA rules and limits can change. For up-to-date information, contact the financial institution offering the HSA, or go to the U.S. Treasury Department's website (www.ustreas.gov).
Consider consulting a financial or tax adviser for advice.
