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How Much Money Should I Put in My HSA per Month?

HSA accounts are something of a unicorn in the world of finance: not many people understand how to use them properly. They have many more possibilities than most people give them credit for. Understanding how these characteristics might benefit you could change your long-term financial situation for the better.

So, what is an HSA? It is a type of savings/investment account, also known as a Health Savings Account. While able to be used by everyone with a qualifying high deductible health insurance plan, it is best suited for younger individuals due to their lower healthcare needs and higher income, as well as wealthier people due to tax savings. Today, we will discuss some of the most important facts you need to know before committing to this plan.

Introduction to HSA

In order to be eligible to deposit money into an HSA, you need to have a high deductible health insurance plan. This means that you might need to use more money out of pocket (up to your deductible) each year before the insurance kicks in. This has the goal of making consumers more aware of costs in the medical arena, as very few people actually know what the costs of health services are.

This greater amount of possible out-of-pocket expense each year, at least up to a certain level, made it so an extra incentive was needed for people to use this type of insurance. Enter the health savings account.

Putting money into an HSA account receives a tax deduction. This is somewhat equivalent to 401(k) or IRA contributions. However, when money gets withdrawn from your HSA account, it comes out tax-free. This cannot be said for a traditional 401(k) or IRA accounts, which are fully taxed when withdrawn. Simultaneously receiving the tax deduction when depositing and the tax-free withdrawal is only possible with an HSA.

Savings can be redirected to a health savings account because high deductible health insurance typically costs a fair amount less than traditional health insurance. Here, they accumulate year-by-year if you do not use them; there is no provision to use it or lose it as these stay until you spend them. If you end up accumulating significant sums in this type of account, it can even be invested for long-term growth if someone wishes. Because healthcare costs tend to be higher later in life, saving a good amount of money this way allows for greater care in retirement, greater tax savings throughout life, and all the benefits of a more flexible budget in the meantime.

Pros of High Deductible Health Insurance & Health Savings Accounts

  1. Tax-deductible deposits to the health savings account.
  2. Tax-free withdrawals from the health savings account for qualified medical purposes.
  3. No tax on growth while the account is accumulating/earning profits.
  4. Your money is not lost due to a “use it or lose it” provision—it is not taken from you unless you spend it.
  5. The money in this account can be spent in other places if you accumulate too much in retirement (subject to certain restrictions) i.e., you could technically use it long-term for other retirement expenses if you accidentally accumulate too much.

Cons of High Deductible Health Insurance and Health Savings Accounts

  1. Health savings account balances can only be used for qualifying healthcare expenses. While this is a broad category, not every expense will apply. This means that you could tie up your money in healthcare and wish you had saved it for other purposes when your budget gets tight. There is a penalty for using these savings for anything that is not qualified for tax advantage.
  2. If you end up spending this money for expenses later in retirement years rather than healthcare costs, there will be income tax on the gains accumulated through the years; they are not avoided if not used for proper healthcare expenses.

How Much Money Should I Put in My HSA per Month?

As for precisely how much to contribute into one of these types of accounts, it is primarily a function of your own personal budget and other aspects. For example, our normal scenario might be to first contribute to your 401(k) in order to get the maximum company match on your contributions.

Next, you might divert additional savings towards the health savings account before increasing your 401(k) contributions. How much specifically to contribute relates to your own needs for healthcare expenses and possibilities. It is best to quickly get the account balance over the annual out-of-pocket maximum, thereby giving you the option to be very flexible in contributions in future years. This flexibility stems from the fact that you know the entire deductible amount that can be satisfied with savings, and the insurance costs less in the meantime.

Minnesota HSA Planning

Looking for even more personalized HSA planning advice? Berger Financial Group offers individualized guidance on this subject thanks to our highly skilled, professional staff in regards to HSA, income tax, and retirement planning. We are happy to assist you in answering all your questions and invite you to fill out the 1-minute form below to be contacted by our team.

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