There's no doubt that steadily funding your HSA is good financial practice. After all, it's a tax-advantaged account that you can use for qualified medical expenses, and the balance rolls over year after year, so you can accumulate a pretty nice nest egg, as well.
Many use their HSAs as additional retirement savings vehicles -- but keep in mind that you can't withdraw funds for non-medical expenses until age 65 without a hefty (read: 20%) fee.
But there are some scenarios in which it's okay to stop funding your HSA, at least temporarily. Read on to learn more about when it's appropriate to pause your HSA funding.
Your financial situation has changed
Whether due to job loss, a move to an area with a higher cost of living, or going from one income to two (like when you have a baby and one partner decides to become a stay-at-home parent), your financial situation will likely change several times over the course of your lifetime.
If you're looking at a drastic (but not permanent) decrease to your family's income, then it may make sense to cut (or decrease) your HSA contributions temporarily. But be sure to resume those contributions as soon as you're financially able since your HSA can help offset eligible medical expenses like copays, deductibles and eligible medication. And trust us, the last thing you need when you're a little short on cash is a huge, unexpected medical bill … or an empty HSA.
You're getting close to age 65 or you're no longer eligible
Once you hit 65, you can withdraw your HSA funds for non-medical expenses without penalty and pay only income taxes. But you may want to stop contributing then, too, since you may be eligible for Medicare. HSA rules dictate that you can only funnel pre-tax dollars to your HSA if you are enrolled in a high-deductible health plan (HDHP) and have no other form of insurance – and Medicare counts as a form of insurance.
If you're not nearing Medicare age, there are other reasons you might not be able to contribute to your HSA, like when you switch health care coverage and are no longer covered by an HDHP. In that case, once you discontinue HDHP coverage and/or get coverage under another health plan that disqualifies you from an HSA, you can no longer make contributions to your HSA. But since you own the HSA, you can continue to use it for future expenses.
That's right, it's your money. Once funds are deposited into an HSA, the account can be used to pay for qualified medical expenses tax-free, even if you no longer have HDHP coverage. The funds in your account roll over automatically each year and remain there indefinitely until used.
You've hit the max contribution limit
This one is sort of a no-brainer, but it's important to note. Your annual HSA contribution limit for 2019 is $3,500 for enrollment as a single person and $7,000 for enrollment as a family. Once you hit that limit, invest your dollars elsewhere, whether in a traditional IRA, a Roth IRA, a 401(k) or other savings vehicle.
Accidentally contributed too much? Withdrawal the extra funds (plus the interest earned) and cut your losses. Or leave the money and pay a 6% excise tax on the extra funds next tax season.
Worth noting: If you forget, the IRS will charge the 6% tax each year until you remove the excess contributions.
There are certain scenarios in which it makes sense to stop funding your HSA. But generally speaking, you should get back to contributing regularly to your HSA as soon as possible. After all, it's tax-free money that can either help offset your annual medical costs or roll over each year and help you build that retirement resource.
Whether it's for covering medical expenses, or planning bigger investments, our Future Healthy column will help support your path to retirement, no matter where you are on the journey. And for the latest info about your health and financial wellness, be sure to check out our HSA Learning Center, and follow us on Facebook and Twitter.