If you own or have recently opened a Health Savings Account (HSA), you may wonder, “How much should I contribute to my HSA?” HSAs are a unique tax-advantaged tool for consumers to pay for qualified healthcare expenses and save for retirement. Understanding how funding works with this account is critical to answering the contribution question.
HSA Funding Options
After enrolling in a qualified High Deductible Health Plan (HDHP), you may open a Health Savings Account (HSA) and deposit money, usually before taxes. Funds can then be used to pay for eligible healthcare expenses, invested, and held for future expenses or retirement – all tax-free.
HSAs are unique in that the account owner keeps the HSA for life, regardless of job or insurance plan changes. However, you can only make contributions while enrolled in an HDHP, although you can spend or withdraw an existing balance whether or not you are enrolled in an HDHP.
Another essential feature of the HSA is that the unspent money in the account rolls over to the following year, so account owners can build up their balance over time and earn tax-free interest.
However, there is one significant contribution restriction: IRS annual limits.
HSA Contribution Limits
Learn more about current limits here. Account owners aged 55 and older get a bonus – they can make additional “catch-up” contributions up to $1,000 over the annual limit each year. Regardless of the limit you can contribute, how much should you contribute?
How Much Should I Contribute to My HSA?
Contributing the IRS max (or as close to it as possible) is best. In doing so, you can invest and earn tax-free money while building up a substantial balance for future use. It’s essential to consider your income, financial status, and monthly expenses before deciding on a contribution amount. Remember, you can adjust your contribution amount as needed throughout the year, allowing you to adapt to changing financial circumstances.
Other Factors to Consider
What else should you consider when asking, “How much should I contribute to my HSA?”
Annual Healthcare Expenses
To figure out how much money to put into your HSA, track eligible healthcare expenses for you and your dependents throughout the year. Use that as your estimate for the following year. Eventually, averaging several years of data can provide an even better estimate.
Are you expecting a child in the coming year? Do your kids need braces? Planning to have LASIK surgery? Are you having a knee replacement? These procedures can be very costly, so be sure to think about this as you consider contribution needs.
Long-term Illnesses or Special Needs Dependents
Remember that HSAs can be used for your personal healthcare expenses as well as those of your tax dependents. If your family includes someone who may eventually need long-term care or whose special needs require expensive care in the short run, that can influence the amount you contribute. Tax savings on contributions will help your money go further in meeting these significant expenses.
Who contributes to your HSA?
Anyone can contribute to an HSA; some employers do so as an additional employee benefit. Family members or relatives may help out as well. And finally, those with an IRA may be eligible to fund an HSA with those funds. However, that is a one-time deal.
The annual IRS limit applies to the total HSA contribution amount regardless of funding sources. HSA contributions exceeding the IRS annual contribution limits are not tax deductible and are usually subject to a 6% excise tax.
It’s a good idea to contribute as close to the annual limits as possible for HSA, healthcare, and retirement accounts. However, HSAs, in particular, can help lower healthcare costs now and in the future while also being used for nearly any reason after you retire. Also, remember that you can adjust your contributions as needed.
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 critical decision.
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