How Much Should I Contribute to My HSA?

HSAs are an excellent means of saving money for those dreaded medical expenses. Understanding when to contribute and just how much is most beneficial for you, can help you to prepare for any expenses that may come your way. Read on to learn how much you should be contributing to your HSA and how you can utilize these funds to best prepare for any future expenses you may face. 

What Is an HSA?

A health savings account (HSA) is a savings account with significant tax advantages that can be used by an individual to pay for qualified medical expenses. In order to contribute to an HSA, you must be enrolled in a high-deductible health insurance plan.

HSAs are primarily funded on a monthly, quarterly, or annual basis. An HSA is owned by the employee but can be funded by either the employee or employer. Any unused balance can be carried forward for use in the following year

Does an HSA Differ From an FSA?

HSAs and FSAs are similar, yet different types of health plans. They are both intended to offer people a tax-advantaged means of paying for health and medical expenses. These plans vary in both function and eligibility.

While there are restrictions on contributions for both types of accounts, there are three key differences between the two:

1. As previously mentioned, HSA funds roll over year to year, while FSAs tend to expire at the end of the calendar year (or at the end of the plan year), though there may be a carryover or grace period, depending on the plan.

2. Employers and employees can contribute to HSAs and FSAs, but there are limits to what an employer can contribute to an FSA based on what an employee contributes. 

3. Unlike HSAs, you do not have to be a member of a high deductible health plan to contribute to an FSA.

How Do HSAs Save You Money?

HSAs offer several key tax benefits:

1. Contributions to an HSA are done through pretax payroll deductions. 

2. You can also choose to deduct those contributions on your federal income taxes. 

3. Any dividends, capital gains, or even earnings on interest are not taxed.

HSAs are built to save you money on a variety of health care costs. This can include anything from over-the-counter medications, to feminine care products, as well as hearing aids and contact lenses. It is crucial, when signing up for an HSA, to understand all of the products and treatments that are considered eligible. 

HSAs themselves cannot save you money specifically on health insurance premiums, however, they can still inadvertently save you money on your insurance. By enrolling in a High Deductible Health Plan (HDHP) you inevitably assume more risk. That said, by accumulating funds into an HSA, you can give yourself a reserve of funds to lessen the strain caused by an expensive medical need. 

When you need to utilize the funds, they can be withdrawn tax-free offering an even greater advantage when those pesky medical payments come around. The other great part about having an HSA is the rollover. Funds don't expire in an HSA so you never need to worry about losing out on available funds or not using them quickly enough. If you don't need the funds, then let them continue to accumulate until you do. 

How Much Should You Contribute to Your HSA?

If possible, it is always best to contribute the maximum amount to your HSA. For reference, here are the contribution limits for 2022:

• Under 55: $3,650 for an individual and $7,300 for a family.

• 55 and Over: $4,650 for an individual and $8,300 for a family.

The IRS updates these limits each year, and since your funds will rollover year to year, it is important to remain aware of these yearly changes.

Due to the diversity of eligible products, rollover options, and security blanket upside, it only makes sense to fund your HSA plan as fully as you are able to. Another way of putting this is if you are financially capable of fully funding your HSA there are really no downsides to doing so. Keep this in mind when looking to fund your own HSA. It can be used as a basis for how much to fund.

Another important factor to consider when thinking about your HSA contributions is whether or not your employer offers an HSA match. Should they match your contribution up to a certain amount, consider funding up to at least that amount. Every dollar matched is essentially free money that can be used to pay for the wide variety of medical expenses you may encounter. 

Many people will not need the excess of funds in their HSA until they are older. But seeing as HSAs rollover year to year, maintaining a constant contribution amount throughout the years is a beneficial retirement strategy. You don't always need to fully max out your contributions for the year either. If you are not in a place financially to contribute the full amount, think about contributing whatever you are able to afford. This could be as little as $20 a month, $50 or even $100. Do your best to make some sort of contribution regardless of how much. Many people opt not to contribute thinking that the funds are unnecessary expenses for them at the time, but this is a mistake. Hindsight might always be 20/20, but proper preparation can improve our overall outlook moving forward.

Can You Keep Your HSA When Enrolling In a New Health Plan?

Not only do HSA plans rollover from year to year, they are also considered independent. In other words, they are not tied to any other plan or entity, and as such, will not go away, regardless of your new health plan. Your eligibility to contribute however, will depend on your current health plan and when you signed up for said plan. 

For example, If you have a family HSA and you decide to change jobs and are no longer enrolled in an HDHP, then you may still utilize the funds in your HSA, but you are no longer eligible to contribute to it. If you begin a new job in the middle of the year and switch to a new HDHP, then you may only be eligible for a partial contribution, regardless of how much you initially contributed. If it happened in June, then rather than the total amount of $8,300, it is possible that you will only be eligible to contribute up to $4,150. 

There are several ways to deal with over-contribution as well. One way is to simply withdraw the total funds that you contributed in excess of the allotted amount. You may also choose to move the contributions to the following year's contribution total. And finally, you may simply pay the taxes on the excess contributions. This option is obviously the most expensive. In order to calculate the total amount, you can use Form 5329. A 6% excise tax will be imposed along with the standard taxes owed on any excess contribution amount.