by Jason Cook
How much should I deposit into my health savings account each month?
The short answer: The maximum prorated amount permitted by the IRS; if that’s financially viable.
The slightly longer answer: If you’re covered by an individual consumer directed health plan (CDHP), the IRS allows you to put as much as $3,450 per year into your health savings account (HSA). If you’re contributing to an HSA, and on a family CDHP, the maximum amount that you can contribute is $6,900 per year. If you’re 55 or older, you can contribute an extra $1,000 annually for a total of $4,450 or $7,900 for account holders on a family plan—with catch-up contributions accepted at any time during the year in which you turn 55.
These HSA contribution limits are new for 2018 and just slightly higher than in 2017—$50 more for self-only coverage and $150 more for those on a family plan. (Refer to our blog post for an explanation of all of the IRS’s changes to contribution limits on health savings accounts and high-deductible health plans in 2018.)
HSA holders are advised to deposit the maximum amount each year because the dollars going into these accounts are tax advantaged. 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- The triple tax advantage! Further, balances roll over at the end of each year, can be taken from job to job, and even into retirement. This is the portability benefit that ensures account holders are able to save long term for future medical expenses.
One oft-cited estimate from Fidelity: A 65-year-old couple retiring in 2017 can expect to spend an average of $275,000 on medical expenses 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. Further, account holders have up until tax filing of the following year to make these post tax contributions for the previous year.
At first glance, contributing $3,450 or $6,900 to an HSA in one year may sound unimaginable. But when taking into account the premium savings of a CDHP, 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.