Usually the first question someone new to Health Savings Accounts (HSAs) asks is, “How much money should I contribute to my HSA?”
HSA contributions provide a great incentive to plan ahead, prepare for big medical bills and save on health expenses. But how does anyone plan for those expenses when they can’t see into the future?
We know that choosing the right HSA payroll deduction can be difficult. So, we put together a quiz to help you identify priorities and determine the best payroll deductions to fund an HSA. And don’t forget – you can always change it if your plans change!
1. How flexible are you with your paycheck? How much extra money do you have for savings or disposable income?
a. My money definitely has no time for lounging around in my checking account. It comes in and heads out to bills before taking a breath.
b. I want to build my savings but right now it’s like the Great Wall of China, fifty bucks a paycheck might get me there in about 1,000 years.
c. I’m pretty flexible. A few hundred dollars a paycheck usually supports my local bar and I can still save some money.
d. I’m fortunate enough to spend money how I see fit. I wouldn’t sweat a few grand into something new.
e. I’m a CEO with nothing to-do but read online blogs.
2. How much in eligible medical expenses are you expecting this year?
a. None, since I’m not expecting any unfortunate lightning strikes.
b. Less than $1,000, Costco prescriptions = affordable.
c. $1,000 – $2,000, if that’s all it takes to be healthy it’s worth it.
d. $2,000 – $4,000, life’s short and expensive.
e. $4,000 – $6,000, might be skipping our European tour this year.
f. $6,000+, that whole ‘apple a day’ thing didn’t really work out.
g. I have no idea (budgeting? What’s that?).
3. What are your financial priorities?
a. The future? I’ll figure it out when I get there.
b. My financial planning is done one year at a time.
c. I have a retirement goal that I’m on track to achieve.
d. I’m hoping to kick my feet up and drink a Mai Tai as soon as possible, that’s why I’m putting 50% of my pay in my 401(k).
Add up your points and then check to see which strategy fits you.
-5 to 10 points: You probably fall in the Non-Planner category. If you can’t save money don’t worry about it. Use a zero balance HSA and be sure to record all of your qualified expenses. When you want a little extra cash, you can put an amount equal to those expenses in your HSA pre-tax and then immediately reimburse yourself – and keep the 25-35% in taxes you avoided on that amount. So if you had $1,000 in qualified expenses, you just saved $250-350 in taxes. This way you never take money out of your paycheck unless you’re immediately getting it back – and more.
11 to 20 points: You probably fall into the Planner category. This means that you may have medical expenses this year or you at least have some extra money you could put into your HSA. If this is the case it probably makes sense to put some money in your HSA as a payroll deduction throughout the year, perhaps $50-100 per check. This helps spread out the pain of reducing your paycheck and makes it possible to use your HSA debit card for medical expenses.
21 to 30 points: You qualify as a Saver. You have enough money and you’d like to think about retirement. It makes sense to start putting money in your HSA now and building up a balance because of the great tax breaks. Most people that are Savers put in the maximum contribution limit, which for 2012 is between $3,150 and $7,250 depending on your age and single/family status.