Due to their increasing popularity as a health care benefit, more employers are beginning to offer HSA accounts to employees as a part of healthcare and retirement packages. Because the HSA account is owned and managed by the employee (even if the employer also contributes to the fund) it offers great flexibility and planning advantages to employees who want to be able to take their money with them and use it how they see fit over the life of the account. Deciding how much to contribute to an HSA is one of the central challenges of managing these innovative accounts. Like choosing to open an HSA account, deciding how much to put into the account is a personal decision.
Introducing the Health Savings Account
Depending on who you are and your reasons for opening a health savings account, you may define the HSA differently. Here are some common ways of explaining your HSA in terms of what it offers.
- A tax-deferred healthcare account. Some people open an HSA primarily to plan for future known or unknown healthcare costs for themselves, their dependent family members or both. Because the money deposited into the HSA account is tax-deferred, using an HSA to pay for healthcare costs gives more value for the dollar.
- A personal savings and investment account. Some people choose to open an HSA account with an eye towards the savings benefits it provides. Because unused funds can be used for other needs — with a 10 percent withdrawal penalty before age 65 and no penalty after age 65 — it can also function as a very effective personal savings and investment account. The investment part comes into play because, like savings accounts, HSA accounts also accrue interest.
- A retirement account. The health savings account is a great vehicle for retirement planning. The major incentive to use an HSA account as a part of your retirement planning is that as long as you use the withdrawn funds towards healthcare expenses before age 65, there is no withdrawal penalty the way there is with a traditional IRA (individual retirement account).
Choosing Your Contribution Amount
There is no one “right” way to decide how much to contribute to a health savings account. You may want to consult a complete consumers guide to health savings accounts to see what others have done and what experts recommend. Some employers offer calculators that guide you to estimate future healthcare costs and balance those against your income, other financial obligations and other savings vehicles. If you are participating in an employer-sponsored HSA plan, it is important to read the fine print of the plan to learn if or how much your employer will contribute to the account on your behalf and how your own contributions may influence that amount.
The following questions can serve as a guide to help you determine the right HSA contribution level for you.
- Do you currently participate in a high-deductible health insurance plan (if not, you will not be eligible to open a health savings account)?
- What is your deductible for your health insurance plan and do you anticipate exceeding your deductible this year?
- What is the average amount of extra money you have left each month after you meet your fixed and variable monthly expenses?
- What do you estimate your future known healthcare expenses will be?
- What other savings or retirement investment accounts do you currently participate in?
- Do you plan to purchase long-term care insurance (the HSA account serves a very similar purpose)?
- What is your current unpaid debt burden and what is your monthly plan for repaying your debt?
- What are your current savings and investment priorities?
- If you have a spouse, are they currently participating in a health savings account?
- Does your employer contribute to a health savings account on your behalf?
- How many savings years do you have left before your anticipated retirement date?
By considering each of these questions, you will begin to develop a greater perspective of how much of your monthly income should be invested into a health savings account.
About the Author:
Wiley Long has been helping individuals and families get coverage and save money for over 20 years. He owns HSA for America.