How much should I put into my HSA?

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If you're wondering how much to contribute to your HSA, learn more about other facets that you should consider before landing on a decision.

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Some questions just beg for a quick, snappy answer. For example:

Q: How much should I put into my HSA?
A: As much as you can.

Of course, the answer to any question involving personal finance is never quite that simple. But if you’re in good financial shape overall, maxing out your HSA contributions each year is one of the best moves you can make.

It’s impossible to determine how much you should (or can) contribute to your health savings account, however, until you understand some of the ins-and-outs of HSAs. Here’s a quick primer.

What's the Purpose of an HSA?

The name of a health savings account, on its face, tells you what it’s meant for: saving money for health expenses. The balance of an HSA can be used at any time, to pay for qualified medical expenses. But there’s more to the picture than that.

First of all, the money that goes into your health savings account goes in tax-free, as pre-tax dollars for a payroll deduction or as an income tax deduction if you contribute on your own. Second, HSA funds can be invested in virtually any financial instrument like stocks, bonds or mutual funds, and the money will grow tax-free while inside the account. Third, money that’s taken out of an HSA account for qualified medical expenses comes out as tax-free withdrawals, whether they’re paid directly to a medical provider or taken out via debit card to reimburse yourself for qualified out-of-pocket expenses.

Those are the triple tax-advantages of a health savings account, and they make an HSA much more than just a way to save for health care costs. It’s also an extremely powerful way to build retirement savings – since you can rollover your HSA account balance from year-to-year, indefinitely.

Who can contribute to an HSA?

You’re able to open and contribute to a health savings account if you are covered by a high-deductible health plan (HDHP). High-deductible health insurance plans normally require lower monthly health insurance premiums, set limits on out-of-pocket maximums, and charge higher-than-usual annual deductibles.

The minimum deductible for an HDHP in 2019 is $1,350 for an individual and $2,700 for a family. In 2020, the minimum deductible for an HDHPis $1,400 and $2,800 for family coverage.

The only other restrictions are that you must be over 18, can’t be on Medicare, and can’t be considered a dependent on someone else’s tax return. If you have a flexible savings account (FSA) you normally can’t contribute to both in the same year.

If you have an HSA, how much can you contribute?

Unfortunately (since HSA tax benefits are obviously a great deal for account holders), the IRS sets annual contribution limits for health savings accounts.

The HSA contribution limit for 2019 is $3,500 for individual coverage, and $7,000 for family coverage. The maximum contribution amounts for 2020 will increase by $50 and $100, respectively. There is also a provision allowing those age 55 and older to make catch-up contributions of an extra $1,000 per year.

It would be tempting, because of the tax savings associated with health savings accounts, to contribute more than the legal maximum – but that’s a bad idea. You’d have to take the money out and claim it as taxable income, and also pay a six percent excise tax on the over-contribution.

Not counting the catch-up provision, the maximum amount you can put into your HSA is around $3,500 if you’re an individual, $7,000 if you have family coverage.

Should you always contribute the maximum amount of money towards your HSA?

Deciding how much to contribute to your HSA

In general terms, it makes sense to always contribute the annual maximum to your health savings account, since any unused balance can be invested, grows tax-free, and can be rolled over at the end of the year. Those with plenty of money to spare should max out HSA contributions every year.

That’s not realistic for many account holders, however. Some people simply can’t spare $3,500 or $7,000 to invest each year, despite the major tax benefits they’d receive.

Those who have limited resources available for investment might prefer to fund retirement accounts like IRAs or Roth IRAs instead. That’s because penalties for early withdrawals are higher for HSA money than for IRA funds (20 percent vs. 10 percent) and the age you have to reach for penalty-free withdrawals is also higher for HSAs (age 65 vs. age 59½).

If you have to set priorities, here's how to decide how much to put into your health savings account.

1. Make sure you have an easily-available emergency fund.

Unexpected medical bills can wreak havoc with finances, but so can other unforeseen issues like replacing a car engine or a hot water heater – and you’ll have to pay a penalty if you withdraw money from an HSA to pay for them. If you don’t have sufficient cash on hand for emergencies, put half of your available contribution into your HSA and half into a bank account as a financial safety net.

2. Contribute at least enough to cover your annual deductible, prescription drug co-pays, or both.

The investment possibilities inside an HSA are terrific, but first things first: it’s a health savings account, designed to let you put aside tax-deductible money for health care costs. Make sure your HSA balance can cover those costs before investing what’s left over in non-liquid assets.

3. Consider your age when deciding whether to invest in an HSA or another retirement account.

When you’re young and relatively healthy, your health care expenses are likely to be much lower than when you’re approaching retirement age. That argues for funding IRAs or other retirement accounts first. As you get older, the likelihood grows that you’ll need to have more money available for medical costs (including long-term care, which is only partially funded by Medicaid). So it makes sense later in life to put away as much money as possible in your HSA, since it can always be withdrawn tax-free for qualified health medical expenses.

4. If you don't have to juggle your funds to allocate them to best advantage, go for the max contribution.

A health savings account is one of the best investment vehicles available for retirement, and it makes sense to take full advantage of it when you can.

One final word on why it’s important to build up the balance in an HSA: a Fidelity estimate finds that the average 65-year old couple will spend nearly $300,000 on medical expenses during retirement. You can never have too much in your health savings account, and it’s never too soon to start building your HSA balance.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.