How much should I contribute to my health savings account (HSA) each month?
The short answer: As much as you’re able to (within IRS contribution limits), if that’s financially viable.
The slightly longer answer: If you’re covered by a high-deductible health plan (HDHP), the IRS allows you to put as much as $3,550 per year (in 2020) into your health savings account (HSA). If you’re contributing to an HSA, and on a family HDHP, the maximum amount that you can contribute is $7,100 per year (in 2020). If you’re 55 or older, you can contribute an extra $1,000 annually for a total of $4,550 or $8,100 for accountholders on a family plan — with catch-up contributions accepted at any time during the year in which you turn 55.
What is an HSA contribution?
An HSA contribution is the deposit of funds (for example, from a bank account or your paycheck) into your HSA. HSA participants are advised to contribute the maximum amount each year because the dollars going into these accounts are tax-free. Contributions made to the HSA are not taxed, earnings on interest and investment gains are not taxed and distributions for qualified medical expenses, taken today, or at any point in the future, are not taxed. All HSA funds carry over from year to year, and your HSA stays with you even when you change jobs. This is the portability benefit that ensures account holders are able to save long term for future medical expenses.
Preparing for retirement
One oft-cited estimate from Fidelity: A 65-year-old couple retiring in 2020 will need an average of $295,000 in healthcare costs throughout retirement. This is up from $260,000 in 2016, so one can only imagine how staggering this figure will be for those who will be retiring a few decades from now.
Monthly cash flow is certainly a concern for all, and if you’re uncomfortable contributing the IRS annual max to your HSA through pre-tax payroll contributions, contribute the maximum amount that you are comfortable with. An often overlooked benefit that an HSA affords is the ability to contribute post-tax dollars and take an above-the-line deduction; essentially reducing taxable income for every post-tax dollar that’s contributed to the HSA. Additionally, accountholders have up until the tax filing of the following year to make these post-tax contributions for the previous year.
Consider the savings in HDHP premiums
At first glance, contributing the IRS-allowed maximum to your HSA in one year may sound unimaginable. But when taking into account the premium savings of a HDHP, compared to a traditional health plan, plus tax savings gained through contributing to an HSA, it becomes more realistic.
Need help determining how much you should set aside in your HSA each month to reach your retirement savings goal? WEX Health provides a free HSA Goal Calculator that will help you determine the right amount for you, taking into account your health plan coverage type, deductible amount, number of years before retirement, monthly healthcare expense and more.
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Editor’s note: This post was first published in January 2018. It was updated most recently updated in September 2020.