10 Reasons Why You Should Max Out Your Health Savings Account (HSA)

10 minute read

Health Savings Accounts (HSAs) are available through most employers and for people who are self-employed, provided the person is covered under a high-deductible health plan. HSAs are savings accounts that are tax-advantaged and designed specifically for paying health care costs. Contributions to these plans are most commonly made by either you or your employer. However, other individuals can also contribute.

How much money should you contribute to your HSA? Here, we will cover the annual contribution limits, the advantages of maxing out your HSA, and whether or not it’s worth it to max out your HSA.

What are the HSA eligibility requirements for 2022?

The only eligibility requirement is that you participate in a qualifying high deductible health plan with deductibles of $1,400 or higher for individuals or $2,800 for families with a maximum out-of-pocket amount of $7,050 for individuals and $14,100 for families.

How much should I contribute to my HSA?

The maximum HSA contribution limit for 2022 for an individual is $3,650 per year and $7,300 for families. Ideally, you should meet the limit set forth by the IRS.

Tax YearIndividualFamilyCATCH-UP CONTRIBUTIONS FOR 55 AND OVER
2022$3,650$7,300$1,000
2021$3,600$7,200$1,000
2020$3,550$7,100$1,000

People who are 55 or older can contribute an extra $1,000 annually for a total contribution of $4,650 for individuals and $8,300 for family plans.

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Can you increase or change your HSA contributions at any time during the year?

One benefit of HSAs is that you can change the amount you contribute at any time during the year, including payroll and non-payroll contributions. Just remember that the contributions still need to remain within the annual limit.

If you have a mid-year change in status, your annual limit will change. It then falls under the “Full Contribution Rule”. If there is a change in status, the HSA annual contribution limit can only increase, not decrease. The new annual contribution limit will be based on whichever of the two following options is the greatest:

  • Determine the annual contribution limit by figuring out the month average by adding the months paid on the family plan to the months paid on the individual plan and dividing by 12.
  • Determine the annual contribution limit by looking at the amount paid as of December 1st.

When does my employer have to deposit my HSA contribution?

It’s up to the employer as to the timing and amount of the HSA contribution. Some of the more common options include paying the lump sum of the contribution upfront, depositing a specified amount each payroll period, making a partial lump sum upfront and then paying a specified amount each payroll period until the end of the year, or paying periodic lump sums.

How to find HSA contributions on W-2s:

When tax time rolls around, you will need to report your HSA contributions on your tax return. Your HSA contributions will be reported on Form W-2 in Box 12 with a code W. Pre-tax employee and employer HSA contributions are listed in the box.

Why should I max out my HSA?

1. There is not one, but three tax advantages

Not only is a HSA tax-advantaged, but it is triple tax-advantaged. The money that goes into your HSA is pre-tax. While the money is in your account, there is no tax on interest earned or on investment gains. Even when you withdraw money from the account, as long as it’s used for qualified medical expenses, it’s still tax-free.

2. Paying for pre-tax medical expenses lowers your tax liability

Contributions made by the employee deposited directly from their paycheck are pre-tax dollars. These pre-tax dollars reduce gross income which also reduces the amount of income tax owed. Withdrawals made to pay for qualified medical expenses are also tax-free. 

Maximizing your HSA gives you more tax-free dollars to cover your medical expenses. While there may be one year when you don’t use as much for medical expenses, it will accrue interest throughout the years, providing you with more money down the road if a major unexpected medical event occurs. If this happens the funds are readily available for qualified health expenses.

3. It serves as a back-up retirement account

HSAs can serve as a back-up to retirement in several ways. If you lose your job or stop working before you turn 65 HSAs can potentially bridge the gap of health care coverage until you’re eligible for Medicare at 65. If you’re over 65, retired, and have health coverage that is employer sponsored, HSAs can be used to pay for prescription drug coverage. HSAs can also be used for long-term care insurance policies. 

Once you turn 65, your HSA can be used to pay for non qualified medical expenses. You will have to pay taxes on the distributions, but there is no penalty. 

HSAs are a great way to maximize your retirement income. You can let the funds accumulate throughout the years and it’s a nice nest egg to pay for qualified health expenses after you retire.

4. There’s no income limit on HSA pre-tax contributions

While there is an income limit for IRA contributions, there’s no limit on income for deducting contributions made to a HSA because income isn’t a factor when contributing to a HSA.

5. HSAs carry over and stay with you wherever you go

At the end of the year the balance of your HSA is carried over indefinitely, meaning it stays in your account at the start of the new year. You also remain the owner of the account even if you retire, switch jobs, or change health insurance plans. Since you can’t lose the money in this fund, it’s a good idea to maximize your growth.

6. The money grows tax-free

While the money is in your HSA, it grows tax-free. There’s no tax on interest earned or on gains from investments. Therefore, the more money you have in your account, the higher the interest earned.

7. You can invest your HSA funds

If it is offered by the custodian, you can invest your HSA funds in mutual funds, stocks, or bonds. The more money in your HSA, the greater the potential exists for higher returns on your investment. Just remember there is risk involved as well.

8. There’s no time limit on reimbursements

There’s no time limit on reimbursing yourself for your medical expenses out of your HSA. If you max out on the contributions and wait for 5-10 years for your money to grow from interest or gains from investing, you’ll have more money in the long run than if you had reimbursed yourself immediately.

9. Funds can be used on anyone claimed on your tax return

Funds from a HSA can be used on you, your spouse, or anyone you claim on your tax return. They don’t have to be on your health plan. The more contributions you make, the more money you will have to go around for medical needs.

10. HSAs can be passed on to heirs

Your HSA can be passed onto your heirs. The more you contribute, the more you will have to pass on to any heirs to help make life easier for them.

So, should you max out your HSA? Yes! There are a lot of advantages to having and maxing out a HSA. There are many retirement and tax benefits and it’s a great way to save money tax-free in the short- and long-term.

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