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How Much Should I Save in My HSA?

By on March 16, 2014 in Money

How Much Should I Save in My HSA?A health savings account or HSA is a tax-deferred healthcare account that lets you set aside pre-tax income today for use on medical spending at some point in the future. If the funds are spent on qualified healthcare expenses then you never pay income tax on your contributions to the HSA.

HSAs are a great tool for not only covering some of your healthcare costs (especially large deductibles associated with the high deductible health plans that often use HSAs), but if you save enough money they can turn into great retirement vehicles as well. You still have to use the funds (at any point in the future) for medical spending to avoid paying tax on them, but as you age into retirement the likelihood that your healthcare spending is going to go up is pretty significant.

Instead of paying for healthcare expenses with post-tax income, you could use pre-tax income and never pay a dime of tax on it. That’s a huge potential win.

But how much exactly should you be saving into your health savings account? It really depends on your situation.

How Much Money to Save in a Health Savings Account

Here are three different levels of saving you might pursue for your HSA.

Minimum Needed: Your Maximum Health Insurance Deductible

Often a HSA is tied to a high deductible health insurance plan. The idea is that you pay lower monthly premiums, but in return you must pay a higher deductible. The deductible on a high deductible health plan (HDHP) this year comes in at $1,250 for individuals that only cover themselves and $2,500 for family coverage.

That means before your insurance truly kicks in to help you out you’ll have to pay that much money out of pocket. If you’re paying out of pocket you might as well pay with pre-tax income through your HSA. Even if you start out small and can only contribute a little to the HSA on each paycheck, do so. You can always increase it later, the funds never expire, and you want to try to build up to covering that deductible.

The Middle Ground: Estimate Your Actual Healthcare Costs

After you have enough money in your HSA to cover your health insurance deductible, the next logical thing to do would be to estimate how much you might spend on healthcare besides your deductible. Once you have an estimate in mind you can save up to help pay those costs, too.

Again, anything you can do to put pre-tax income into an account that won’t require you to pay tax as long as the money is used for healthcare spending, the better.

The Maximum Possible: Go All In

Lastly there is the strategy of dumping as much money as you can afford into the account. You get a tax break now, and you might never pay tax on that income in the future. There is no other savings vehicle like this in the United States. The ability to completely avoid paying tax is a huge boost.

How much can you contribute if you want to max out your HSA contributions? For single coverage individuals the annual contribution limit is $3,250 while the family coverage limit is $6,450.

Those large contributions tied to tax-free growth over the years can be a huge boost for just about anyone.

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