What should I do if I contribute too much to my HSA?

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With all of the tax benefits available with HSAs, it can be easy to go overboard and accidentally over contribute. What do you need to do if that happens?

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There's a lot to like about your health savings account (HSA). You may be looking to score a triple-tax break or you may want to invest your HSA money to grow a decent-sized nest egg for healthcare expenses in retirement. With all of these financial perks, you may catch yourself overcontributing. Here's why contributing too much to your HSA is an expensive problem—and how to fix it.

How much can I contribute to my HSA?

Before you start making HSA contributions, it's important to make sure you are eligible. To qualify, you need an HSA-eligible, high-deductible health insurance plan. Your health insurance must have a deductible of at least $1,350 if you are single or $2,700 for your family’s plan.

If you're still not sure if you qualify, don't be afraid to speak with your company's HR department. Or, you can contact your health insurance company to confirm your plan is qualified. Once you have the green light, you can start making contributions—as long as you stay within these limits for 2019:

  • Single - $3,500
  • Family - $7,000

If you’re 55 or older, you can deposit another $1,000 for a catch-up contribution. These limits include annual contributions from both you and your employer. As long as you stick with an eligible health insurance plan, you can keep making 2019 contributions until next year’s tax deadline — April 15, 2020.

What happens if I contribute too much to my HSA?

One of the biggest perks of an HSA is getting access to three different tax breaks. You may qualify for a tax deduction when the money goes in. You can invest and grow the money tax-free. When you need the money, you can withdraw it anytime, penalty-free, for qualified medical expenses.

But if you deposit more than your annual HSA contribution limit, you can't claim a tax deduction for the extra amount. In the eyes of the IRS, your excess contribution becomes taxable income. To make matters worse, you will have to pay an extra 6 percent tax on your excess contribution.

To avoid paying a 6 percent excise tax, you can withdraw the extra contribution money. But this fix is only allowed if you meet the following rules:

  • You need to withdraw your excess contribution before your deadline for tax returns—including extensions.
  • If you earned money on your excess contributions, that money needs to come out, too. You will need to claim the earnings as "other income" on your tax return.

How to be proactive about your HSA contributions

We get it—it's tough to keep track of HSA contributions throughout the year. It can be especially confusing if you’re trying to stay on top of your company deposits—along with your own. Rather than laboring over yet another spreadsheet, you can rely on us to do the heavy lifting. The Lively dashboard offers an at-a-glance look at exactly where you stand year-to-date. The contributions tracker makes it easy to see how much you have deposited—right above your annual limit. By keeping the information at your fingertips, you will have one less thing to worry about at tax time.

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.