How Much Should I Contribute to My HSA?

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!

The Quiz

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).

Answers

Add up your points and then check to see which strategy fits you.

1.
A: -5
B. 0
C: 5
D: 10
E: 15

2.
A. 5
B. 5
C. 10
D. 10
E. 10
F. 10
G. 5

3.
A: 0
B: 0
C: 5
D: 10

-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.

7 thoughts on “How Much Should I Contribute to My HSA?

  1. So basically, unless you are expecting large medical bills in the near future and you do not have the money on hand to pay for them right now, there is no reason to contribute anything to your HSA. Since you are allowed to reimburse yourself, tax-free, why wouldn’t you do just that. See, the problem is once you put the money in the HSA, you will never be able to take it out without not only having to pay the taxes on it, but you will also be heavily penalized if you need to withdrawal it for something that’s not a qualified health expense. Here’s a bad scenario, you have a job that only offers high deductible health insurance, so you contribute $100/month to HSA in case you ever are hospitalized. A year goes by, you haven’t needed to use the money, and now you have $1200.00 sitting in an account that you cant touch without being penalized. Then you get a new job with great healthcare, no need for HSA anymore. All the while, your money in the HSA isn’t just sitting there. It’s being invested and borrowed to others so the HSA holders can make a profit off of it. That’s the whole scam. Rather than you keep your own money and have it for whatever you want when you need it, they hold it and make money off it. Money never just sits around in a savings account. That’s not how it works.

    • Hi Triago,

      If you don’t want your money sitting in an account that makes it so you can only use it for medical expense, then yes, reimbursing yourself after you have the expense is the way to go.

      For some people, this is less important and there are a few reasons people contribute to the account before they have their expenses. One reason is many people wish to maximize the amount they save in taxes. I’ll illustrate an example:

      Scenario 1: During 2013, John Doe contributed the maximum amount to his HSA $3,300. John Doe pays 25% in income taxes and about 7.6 percent in payroll taxes. If John Doe had not put the money in his HSA, he would’ve received only $2,224.20 in his paycheck which he could spend. The rest of that $3,300 would’ve been paid to the IRS in taxes. In other words he has more money than if he had taken the money in his paycheck. Granted your observation is correct, he can only spend the money on medical expenses, right now. He does this every year though and slowly build up a balance in his account. 10 years later he is 65 and ready to retire. At this point he can withdraw all the funds from his HSA and spend it on whatever he wants and he will only pay income taxes. His income tax rate at 65 is actually lower than when he was younger so he is also paying less in taxes. Additionally, while the money is in the account, he has earned a small amount of interest on the balance and he has invested the money in mutual funds. Both the interest on the mutual funds and the interest are tax free. In other words, the account is almost exactly like a 401(k) except if he spends the money on medical expenses he never pays taxes.

      Scenario 2: Evan Buck knows he’s not very good at planning for the future. He is afraid that he will have a big accident at some time in the future requiring him to pay up to the out-of-pocket max (OOP Max) on his insurance. He also doesn’t have a very big paycheck. For this reason he does a regular, small deduction from his paycheck. Over the year he is able to fund his account up to his OOP Max and he stops funding the account at that point. From then on if he ever has an accident he can be sure that he has the money to cover the expense. If he changes insurance, to a better plan with a lower OOP Max he can spend down the balance in the HSA to pay for copays or other things until he has a balance that matches the OOP Max again.

      Those are just two examples but there are lots of reasons to fund your account ahead of time and lots of reasons (as you’ve illustrated) not to. It’s entirely up to you and the accounts are flexible for that reason.

  2. I am being offered the opportunity this year for HSA. I have read where some of the qualifing purchases are pretty vauge. I was really on board with the offer but now i am not so sure. thanks for the comments. i hope i make the right decision.

    • Hi Kim,

      While IRS guidelines on qualifying purchases can be pretty vague in some cases, they ultimately base their stance on which expenses are considered qualified or non-qualified for the HSA on the following criteria found in IRS Publication 502:

      “Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes.

      Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They do not include expenses that are merely beneficial to general health, such as vitamins or a vacation.”

      For your reference, here is a link to the complete publication: http://www.irs.gov/pub/irs-pdf/p502.pdf. You’ll note under the section titled ‘What Medical Expenses are Includible” that they mention that the list of expenses does not include all possible eligible expenses, and that you should reference their definition of a medical expense (listed above) to determine if an expense not on the list is still eligible.

      Carmen

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