Basically, your contributions should be (the maximum you can afford to save for retirement)+(whatever you're budgeting this year for medical expenses) up to $3600 in one year, then avoid withdrawing anything even for medical if you can afford to.
Are you taking the right approach to your HSA? As of the end of 2023, the average HSA balance was $4,380. That's up from $3,930 at the end of 2022. If you have an HSA, it's a great thing to contribute more each year than you did the last year.
HSA contributions in excess of the IRS annual contribution limits ($3,600 for individual coverage and $7,200 for family coverage for 2021) are not tax deductible and are generally subject to a 6% excise tax. If you've contributed too much to your HSA this year, you can do one of two things: 1.
We generally suggest keeping two to three years' worth of routine medical expenses in cash, cash investments, or similar low-volatility investments within your HSA.
If you're able to make the maximum contribution each year, then it's suggested that you do so. Some years you may need to use more of your HSA contributions than other years. Just remember, there's no yearly minimum you have to spend from your HSA and your entire HSA automatically rolls over each year.
Finally, consider which account will give you the most tax benefits. An HSA is taxed in essentially the same way as a 401(k), except it also includes tax-free medical withdrawals, so in that sense, the HSA wins.
Factor monthly contributions into your budget
You can start small, perhaps setting aside $25 to $50 per paycheck. Consider also trying to cut back on non-essential spending, such as foregoing one of your app subscriptions, reducing meals out or making your morning cup at home versus going to a coffee shop.
Once you turn 65, you can use the money in your HSA for anything you want. If you don't use it for qualified medical expenses, it counts as income when you file your taxes. Six months before you retire or get Medicare benefits, you must stop contributing to your HSA.
Generally, if you're younger and/or healthier, an HSA could definitely be worth it. What's in it for you is major healthcare coverage, potentially lower insurance premiums, and a tax-deferred account that can grow over time.
The average annual worker premium contributions for workers in HSA-qualified HDHPs are $1,136 for single coverage and $5,173 for family coverage.
2024 HSA contribution limits
The HSA contribution limits for 2024 are $4,150 for self-only coverage and $8,300 for family coverage. Those 55 and older can contribute an additional $1,000 as a catch-up contribution.
About one in five Americans report having a household HSA or FSA account. Dietary supplement users are more likely than non-users to report having an account. Which of the following individual health account options do you or your household use to cover any health expenses?
Still, despite workers spending more on health care in 2022 than in previous years, average balances in HSAs increased, rising from $4,318 in 2021 to $4,607.
Contributing the maximum annual contribution and investing for the long term is the best way to get the most benefit from your HSA. Avoid using the HSA as your emergency fund because nonqualified withdrawals are subject to ordinary taxes and possibly penalties.
Unlike many flexible spending accounts (FSAs) and health reimbursement arrangements (HRAs), unused HSA funds automatically carry over to the following year. Even if your employer provided the account and made contributions, the account belongs to you — so any remaining funds are carried over every year.
Because HSAs come with several tax benefits that could save you money, you may want to consider contributing as much as you can to your HSA.
If you've mistakenly used HSA funds for nonqualified expenses, you must repay the distribution amount back into your HSA by the tax filing deadline for the year in which the distribution occurred. By reimbursing your HSA, you can avoid the income tax and the 20% penalty on nonqualified distributions.
Gym memberships. While some companies and private insurers may offer discounts on gym memberships, you generally can't use your FSA or HSA account to pay for gym or health club memberships. An exception to that rule would be if your doctor deems fitness medically necessary for your recovery or treatment.
The short answer: As much as you're able to (within IRS contribution limits), if that's financially viable. If you're covered by an HSA-eligible health plan (or high-deductible health plan), the IRS allows you to put as much as $4,150 per year (in 2024) into your health savings account (HSA).
#2 Save enough to cover your annual deductible.
Having an HSA balance equal to your annual health plan deductible creates a solid foundation, giving you a little peace of mind knowing you can cover these expenses.
What happens if I contribute more than the IRS annual maximum? If your HSA contains excess or ineligible contributions you will generally owe the IRS a 6% excess-contribution penalty tax for each year that the excess contribution remains in your HSA.
Drawbacks of HSAs include tax penalties for nonmedical expenses before age 65, and contributions made to the HSA within six months of applying for Social Security benefits may be subject to penalties. HSAs have fewer limitations and more tax advantages than flexible spending accounts (FSAs).
For a single person who puts the annual maximum of $4,300 into their HSA, the tax savings would typically be between $860 and $1,505 annually. A family could save almost $3,000 per year on income taxes if they contribute the maximum amount of $8,550 and have a tax rate of 35%.
Medical expenses are inevitable, so it could be a smart strategy to max out an HSA, especially since you don't risk losing the money and can take full advantage of the tax benefits. Just be cautious about prioritizing maxing out your HSA if you have other financial needs that could make better use of that cash.