How Much to Put Into a Health Savings Account

If you’re enrolled in a high-deductible health plan (HDHP), a health savings account may help cover some expenses. You can use a health savings account to pay for qualified medical expenses that your health plan doesn’t cover. However, an HSA is also a savings option that offers some tax benefits.

Let’s start with some key guidelines for determining how much to contribute to an HSA based on IRS-determined limits and minimums for 2022.

[READ: Keeping Track of Health Information: What You Should Know.]

2022 Numbers: HSA Maximums, Minimums

According to the IRS, these are the limits and minimums established for 2022:

— As an individual you can contribute up to $3,650 in 2022. The maximum contribution for families is $7,300.

— If you are 55 or older, you can put an additional $1,000 in a health savings account.

— The minimum deductible amount is $1,400 for an individual and $2,800 for family plans.

— The maximum out-of-pocket limit is $7,050 for individuals, $14,100 for family plans.

— Consumers can make a one-time, tax-free transfer of IRA funds into an HSA. However, the person must stay enrolled in an high-deductible health plan and eligible for the HSA for a 13-month period after the transfer.

If you’re working, the money comes out of your paycheck before taxes — the same as a 401K. If you don’t work, you will need to find a health care plan that has HSA eligibility. If you’re unemployed or retired and you cannot find an eligible plan, you cannot participate. If it comes out of your paycheck, it reduces your gross income. If you pay out of pocket, it can be tax deductible. Both options offer a tax benefit.

After the money is in your account, you usually can access it via a debit card or checks connected directly to your HSA. When you withdraw funds from your health savings account to pay for qualified medical expenses, this withdrawal is tax free. These qualified medical expenses are defined by the IRS and include co-pays, medical supplies, prescriptions and possibly even eyeglasses and dental fillings. However, any HSA fund used for non-qualified medical purposes is taxable.

Allyson Heumann, a professor of practice at Tulane University in New Orleans, adds, “Qualified medical expenses are normally the things that happen at physicians’ offices, laboratories, pharmacies and hospitals. Before you use your HSA debit card or check for something, make sure it qualifies for HSA coverage.”

Jesse Slome, director of the American Association for Long-Term Care Insurance, notes, “You also may use your HSA funds, free of tax and penalty, to pay for Medicare Parts A, B and D premiums.”

[READ: Does Long-Term Care Insurance or Medicare Cover Assisted Living?]

Tax Breaks and Benefits of an HSA

“When you put a certain amount in your HSA every year, you don’t have to pay taxes on it; and you never have to pay taxes as long as you use it for qualified medical expenses,” Heumann says. However, she observes, “if you have health issues and you don’t have the funds in your HSA to cover the deductible, you’re still responsible for that amount.” For high deductible plans, this could mean $10,000 or more. “There is a reason that health care expenses are the leading cause of bankruptcies in this country,” she notes.

You can use your HSA account for expenses other than medical issues, but you will be subject to a 20% withdrawal penalty. This is in addition to any income tax you owe on the money. Once you reach age 65, you don’t have to pay a tax or penalty on withdrawals; but you are taxed on the money based on your ordinary income. For example, if you withdraw $20,000 to pay for non-medical expenses and your marginal tax rate is 22%, you will pay 22% taxes on that amount. At the same time, HSA contributions that exceed the IRS annual contribution limit are generally subject to a 6% excise tax.

It is important to be alert about HSA fees, which can add up.

“If your employer is picking up all the fees, it’s important to determine what they are and make sure you can afford them if you retire. You can roll your HSA to another health savings account if the fees are too high. However, there typically is a small fee involved in rolling your money from one HSA to another,” says Heumann. If you’re moving your money, make sure that the move costs less than the fees you are trying to avoid.

[Read: Best Insurance Companies for Medicare Part D Prescription Drug Plans.]

Should I Max My HSA Contributions?

If you have the ability to contribute the maximum to your HSA, there’s really no reason not to do so. However, things get a little more complicated if you’re trying to decide between funding your HSA and your 401(k).

In this case, you may consider if your employer contributes to your HSA. If so, you can open an HSA and fund the minimum to take advantage of this contribution. If your employer matches your HSA contribution, you may want to contribute enough to max out the matched funds. If matching funds are available for your 401(k) but not your HSA, that may be a better option for your investment. However, whatever the case, you need to think about what you are saving for and how much of your savings you anticipate being needed or used for medical expenses, the main function of your HSA.

If it’s financially feasible, making the maximum annual contribution to your HSA can be a wise retirement savings strategy. Remember, the HSA enables you to save for future health care costs without paying taxes when you withdraw the funds, unlike with a 401(k).

You may want to consult with your financial advisor or accountant before you make any decisions. However, be sure to consider all relevant factors. These include the rate of employer matching funds to your HSA and 401(k), whether you’re fully vested in your 401(k) and how long you plan to continue to work.

At the same time, look at your overall financial picture, including your budget, other financial goals (such as moving to a retirement community), any potential future health care costs based on any current illnesses or problems, any need to pay down debt and the potential investment returns from HSA as compared to your 401(k).

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