HSAs offer the best tax deal in the American tax code. But that tax advantage only works if you follow the rules. Here are five common mistakes that cost HSA holders real money every year — and how to avoid them.
1. Not Keeping Receipts
This is the most expensive mistake. Without receipts, you cannot prove that a withdrawal was for a qualified medical expense. That means the IRS treats it as ordinary income plus a 20% penalty if you are under 65.
The fix is simple: photograph every medical receipt and store it digitally. Paper fades, gets lost, and burns in house fires. A digital record with the date, amount, provider, and category is all you need. Tools like HSA Tracker make this automatic.
2. Missing the Contribution Deadline
You have until April 15, 2027 to make HSA contributions for the 2026 tax year. Many people assume the deadline is December 31 and miss out on last-minute contributions that could reduce their tax bill.
If you have not maxed out your 2026 HSA contributions, you still have time after the calendar year ends. Set a reminder for March to review your contribution totals and top off if needed.
3. Forgetting State Tax Rules (California and New Jersey)
HSA contributions are deductible on your federal return. But California and New Jersey do not recognize HSAs as tax-advantaged accounts. If you live in either state, you owe state income tax on your contributions and any investment gains inside the HSA.
This catches people off guard at tax time. You need to add back HSA contributions and earnings on your state return. Your HSA provider may not send you the right state-level forms automatically, so work with a tax professional or use tax software that handles this correctly.
4. Double-Dipping with an FSA
You cannot have a general-purpose Flexible Spending Account and an HSA at the same time. If your employer offers both and you accidentally enroll in a traditional FSA, you become ineligible for HSA contributions for the duration of the FSA plan year.
The exception is a Limited Purpose FSA (LPFSA), which covers only dental and vision expenses. An LPFSA is compatible with your HSA. During open enrollment, double-check that you are selecting the right FSA type — or opting out entirely if you want full HSA eligibility.
5. Not Investing HSA Funds
Most HSA holders leave their entire balance in cash. According to the Employee Benefit Research Institute, over 80% of HSA assets sit in cash accounts earning minimal interest. That is a massive missed opportunity.
The whole point of the shoebox strategy is to let your HSA grow tax-free over time. If your balance exceeds what you need for near-term medical expenses, move the rest into a low-cost index fund. Even a conservative 6% annual return turns $4,000 in annual contributions into over $100,000 in 15 years — all tax-free.
Check if your HSA provider offers investment options. If they do not, consider transferring your HSA to a provider like Fidelity that offers commission-free index funds with no account fees.
The Bottom Line
The HSA triple tax advantage is worth thousands of dollars over your lifetime — but only if you avoid these common pitfalls. Keep your receipts, max your contributions, know your state tax rules, avoid FSA conflicts, and invest your balance. Do all five, and your future self will thank you.