How Much Should I Contribute To My HSA?

A Health Savings Account, or HSA, is a tax-advantaged tool for healthcare consumers enrolled in a high deductible health plan (HDHP). An HSA is designed to help account owners save money (via tax-free contributions) to pay for qualified out-of-pocket medical and healthcare expenses (tax-free withdrawals). It can also be used as a supplementary retirement account. For many HSA owners, a common question is “how much should I contribute to my HSA?”

How much can I contribute to my HSA? (Annual contribution limits)

Before getting to the how much should you contribute, let’s address how much you can contribute.

Per IRS regulations, HSA contributions are tracked on an annual basis. In 2019, the maximum amount you can contribute is $3,500 for individuals and $7,000 for families. In 2020, the limits go up to $3,550 for individuals and $7,100 for families.

Plus, for account holders age 55 and older, they can make additional “catch-up” contributions up to a maximum of $1,000 over the annual limit.

How much should I contribute to my HSA?

On the most basic level, as much as you can afford, up to the IRS limit. However, everyone has different financial needs and concerns. Keep in mind the following considerations when putting money in your HSA:

Annual healthcare expenses

For many account holders, this is the biggest factor in the how much to contribute to my HSA debate. The answer depends on the amount you spend on healthcare expenses each year. The best way to determine this figure is to track your expenses, including co-pays, deductibles, prescription medications, dental care, and vision care, throughout the year and total them up; this exercise will give you an estimate to work with. If you have several years’ data, find the average and make your decision based on that.

Other factors to keep in mind include chronic illnesses, special needs, or upcoming expenses (such as a new baby or braces for a child).

Who contributes to your HSA

Believe it or not, anyone can contribute to your HSA, including your employer. Many companies do this as a perk for employees. Family members or relatives could help out as well.

No matter who contributes to your HSA, the annual contribution limit still applies. If you have other people putting money in your account, make sure the total contributions (yours and others) don’t exceed the limit. HSA contributions that go over the IRS annual contribution limits are not tax deductible, and are usually subject to a 6% excise tax

Your goal for having an HSA

No matter your goal – healthcare expenses or retirement fund – contribute as much as you can afford up to the annual limit.

If your healthcare spending exceeds the HSA limit, try to contribute the maximum amount as you will have to use that money anyways. If your cash flow is tight, the tax savings may be enough to make up the difference. Conversely, if you have minimal health care expenses and don’t use all of your set aside money, the unused funds roll over to the following year. This allows you to save up for future healthcare costs or to use down the line in retirement.

If you have minimal medical expenses and plan to use HSA for investing (to grow your account tax-free), the amount you contribute depends on your cash flow and retirement savings goals. You don’t have to invest your entire HSA balance, which can provide a cushion in the event of unexpected medical expenses.

A final consideration

With an HSA, you can change the amount you contribute at any time during the calendar year. Given that financial needs can change at any time, this allows you to increase or decrease your contributions accordingly. If contributions are deducted directly from your paycheck, be sure to notify your employer of the change.

If you’re still wondering how much to contribute to 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 important decision.