During enrollment season, people who own a Health Savings Account (HSA), or have recently opened one, wonder, “How much should I contribute to my HSA?” HSAs are a unique tax-advantaged tool for healthcare consumers to pay for qualified healthcare expenses. Understanding how funding works with this account is key to answering the contribution question.
After enrolling in a qualified high deductible health plan (HDHP), people may open a Health Savings Account. They can then deposit money into the account (usually before taxes) to pay for eligible healthcare expenses. If they keep the account after age 65, they can use it as a quasi-retirement account.
The unique aspect of HSAs (as compared to Flexible Spending Accounts or Health Reimbursement Arrangements) is that the account owner keeps the HSA for life. It does not matter if you change jobs or switch to a different insurance plan; once you open an HSA, it is yours forever (it is important to note that you can only make contributions while enrolled in an HDHP). With an FSA or HRA, the employer owns the account, which means the employee leaves it behind when they leave the company.
Another important funding feature of the HSA is that the
unspent money in the account rolls over
to the next year. There is no use it or lose it with an HSA. Since the money stays in the account, account
owners can build up their balance over time. They also earn tax-free interest,
and can invest part of their balance if they choose.
However, there is one major contribution restriction: IRS annual limits.
HSA Contribution Limits
In 2020, those with single coverage, they can contribute up to $3,550 while those with family coverage can contribute up to $7,100. This is a raise from 2019, during which the IRS maximum is $3,500 for those with single HDHP coverage, and $7,000 for those with family coverage.
One bonus is for account holders age 55 and older; they can make additional “catch-up” contributions up to $1,000 over the annual limit.
Now that you know
how much you CAN contribute, let’s talk about how much you SHOULD contribute.
How Much Should I Contribute to My HSA?
The simple answer is: as much as you can afford up to the IRS max. With the ability to invest and earn money tax-free, and indefinite roll over, you can build up a sizable sum with what you don’t spend. However, many factors can affect what is right for you, starting with your income and financial status.
A good place to start is by adding up your necessities (mortgage/rent, food and clothing, retirement savings, and other living expenses). Then ask yourself, “How much can I contribute to my HSA on a monthly basis without impacting these expenses?”
Keep in mind that
you can change your contribution amount at any time during the plan year. This
allows you the flexibility to change as your financial needs change.
How Much Should I Contribute to My HSA: Other Factors to Think About
What else should you consider when thinking about, “How much should I contribute to my HSA?”
Annual healthcare expenses
For many account holders, this is the biggest factor. The answer depends on how much you spend on medical and healthcare expenses each year for yourself and dependents. The best way to determine this figure is to track your expenses throughout the year and total them up; this will give you an estimate to work with. If you have several year’s data, take the average and make your decision based on that.
Are you expecting a child in the coming year? Do your kids need braces? Are you having a knee replacement? These procedures can be very costly, so be sure to think about this as you plan ahead.
Long-term illnesses or special needs dependents
Anyone who has wrestled with these challenges knows how quickly the medical costs can pile up. Putting aside enough money and taking advantage of the HSA tax savings can help ease the financial burden.
Who contributes to your HSA
Did you know that anyone can contribute to your HSA (including your employer)? Many employers do this as a perk for employees. Family members or relatives will often help out as well. Also, if you have an IRA, you may be eligible to fund your HSA from the retirement account.
No matter how your HSA is funded, the annual IRS limit applies to the total contribution amount.
contributions that go over the IRS annual contribution limits are not tax
deductible, and are usually subject to a 6% excise tax.
The Answer: How Much Should I Contribute to My HSA
No matter what your goal is for your HSA – healthcare account or retirement account – put in as much as you can up to the annual limit. HSAs are a great financial tool for helping reduce the cost of healthcare (now or in the future); and they are also beneficial if you build up the account long term and use it after you retire. Remember, you can always change your contributions depending on your financial needs.
If you’re still wondering how much to contribute to your HSA, talk with a financial advisor or a tax expert. Your company’s HR personnel or plan administrator can also help. It pays to be well informed before making this important decision.
DataPath, Inc creates cloud-based HSA management solutions with integrated investment features.