HSA Contributions: How Much Is Enough?

Have you put money in your health savings account (HSA) recently? If you have an HSA-eligible high deductible health plan, consider putting HSA contributions at the top of your to-do list. HSAs offer even more tax advantages than retirement accounts and can be a big help when you have medical bills.

The Benefits of HSAs

Contributing to an HSA cuts your taxes in a few different ways. First, you get a tax deduction for the amount you contribute, up to the maximum set by the IRS. Then, you can invest the money in your HSA — and you don’t owe taxes on the investment gains or any interest earned on the account.

Withdrawals to pay for eligible medical expenses are also tax-free. So you pay less in taxes while building up savings that you can use in the future to pay for doctor visits, prescription drugs, hospital bills or other qualifying medical expenses. Perhaps best of all, the money in your HSA never goes away. Any funds left over at the end of the year roll over and are ready for you to use whenever it’s needed.

If you forget to bring your HSA debit card to your appointment, never fear. You can pay with your regular credit or debit card and be reimbursed out of your HSA funds later.

Your Maximum Contribution

How much you can contribute to your HSA depends on whether your high deductible health plan covers just you or you and a family member. It also depends on your age. As of 2017, you can contribute a maximum of $3,400 to an individual HSA or $6,750 to an HSA for your family, according to the IRS. If you’re 55 or older, you get to contribute another $1,000 on top of that.

It’s important to note that there can’t be joint owners on an HSA. Even if you’re married and have an account with a family limit, you’ll remain the only accountholder.

How Much Should You Contribute?

To figure out if you should contribute the maximum, first ask yourself how equipped you would be to cover unexpected non-medical expenses in the near future. If you don’t have an emergency fund, then you should split your savings between your HSA and a more liquid savings account. That’s because you’ll have to pay a penalty to withdraw from an HSA for expenses that aren’t health-related, though unexpected medical bills are one of the most common emergency expenses.

Second, ask yourself if you’re on track with retirement savings. While the ideal thing to do is to contribute the maximum to both an HSA and a retirement account, if you can’t afford that, it might be a good idea to contribute less to the HSA and save more for retirement. Though keep in mind that the penalty for using an HSA for a non-medical expense goes away at age 65, so any funds in the account at that time could be used for retirement expenses. As a bonus, unlike a traditional IRA, there are no mandatory distributions on an HSA.

All set for short-term expenses and retirement savings? Focus on your HSA. The money in your HSA will grow until you need it for medical expenses, whether those come next year or further in the future.

When deciding your contributions, take into account all amounts that you know you’ll spend on medical care in the next year. For example, maybe you spend $150 per month on prescription drugs. In that case, you could put $1,800 in your HSA so that you enjoy the tax advantages on money you’re going to end up spending on health care anyway. Another option is to contribute the amount of your annual deductible. Then you’ll have enough to cover your out-of-pocket costs if you incur a large bill or a medical emergency.

As with any savings effort, starting sooner is better than later — just take the time to understand how much it makes sense for you to contribute.

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