How To Set HSA Contribution Limits That Are Right For You

October 29, 2012

Health Savings Account’s or HSA are becoming an increasingly popular choice for people who want to get the biggest bank for their buck with their health insurance. It doesn’t matter if you purchased one on your own, or ended up with one through work. Your HSA eligible health insurance plan provides you the most financial flexibility when dealing with your health care.

More than 13.5 million Americans are covered by Health Savings Account (HSA)-eligible insurance plans, a more than 18 percent increase since last year, according to a January 2012 census released by America’s Health Insurance Plans (AHIP).

This new found financial freedom can get you into trouble if you don’t know the ins and outs of your HSA. It’s very important, if you have the cash flow to support it, to fund your HSA bank account on a regular basis. However, if you don’t take the time to set your own contribution goals your account could easily become malnourished or over feed.

The Basics

First let’s run down what you need to know to get started. You are going to want to make sure your health insurance plan is HSA eligible. That means for a single person you need a High Deductible Health Plan (HDHP) with a deductible between $1,200 and $5,950 or $2,400 and $11,900 for a family. It’s also important to remember that the balance of your HSA account will always roll over from year to year. No “use it or lose it” here. The money you deposit is tax deductible going in and tax free on the way out.

Yearly Limits

Of course for 2012 the most you are legally allowed to contribute to a HSA is $3,100 for a single person and $6,250 for a family per year. In 2013 those numbers will increase to $3,250 and $6,450 respectively. These limits are laughable an unobtainable for most people. If you are able to fund your account to the yearly maximum, you are welcome to share your secret to financial prosperity with the rest of the class. However, just because you can do something doesn’t mean you should.

Watch Out For That Tax Penalty

The reason you want to be very shrewd with your HSA contributions is because if you over fund the account you could find yourself withdrawing money for non qualified medical expenses. This HSA no no will have you screaming like a baby when you see you were charged a 20 percent tax penalty for that withdrawal. Also, don't forget you will have to pay income tax on that penalized withdrawl.

While there are worse things in the world than having a savings account with too much money in it. You want to make sure you have the proper amount of money set aside for your medical bills without crippling your monthly cash flow.

Setting Your Own Limits

This is where taking the time to analyze your past medical expenses will pay huge dividends. Your first contribution goal should be to accumulate enough money in your account to cover your deductible. This will protect you from that unforeseen major medical procedure and should be a sufficient limit for most people. Rarely are you going to hit your annual deductible. If for some reason you find yourself hitting it on a regular basis, you either are in need of regular medical treatment that is costly, or your deductible is a little too low and you might want to consider increasing it.

If funding your HSA to your deductible is not enough for you, then you are going to need to examine your financial situation a little closer. A great secondary goal is to have enough money in your HSA to not only cover your deductible, but also your average annual medical expenses. Crunch the numbers on what you have spent over the last five years on health care and you should have a pretty good idea what you need to contribute moving forward.

Pay As You Go

A lot of people who bought a HSA plan did so because it was all they could afford, therefore additional funds are hard to come by. If this situation sounds familiar, don’t worry you can still make a HSA work for you. As long as you have enough money in your account to cover any maintenance charges, you can use the account on a pay as you go basis. You will want to do this to take advantage of the tax savings by funneling all money used on medical expenses through the account.


If at any point in time you find yourself not keeping up with your contributions, or have forgotten to use the pay as you go approach, you can reimburse yourself for any medical expenses during that tax year.

That means the $3,000 MRI bill you paid six months ago can be reimbursed through your health savings account to maximize those tax savings.

Over 55 Catch Up

If you are between the age of 55 and 65 you can fund the account at an accelerated rate. During that time you will be allowed to deposit an additional $1,000 a year in your HSA bank account.

What Happens to Your Contributions at age 65?

If you are approaching age 65 and getting ready to go on Medicare, you might be wondering what will happen to your unused HSA contributions? Don’t worry, your money is still good. While you will no longer be able to make additional contributions, you can use the existing money to pay for the same qualified medical expenses you did when you had your HSA plan. You can even use that money to pay for your nursing home care, Medicare Part D and long-term care premiums.

It’s important to remember that utilizing a HSA bank account in conjunction with your high deductible health plan is completely optional. However if you do take the time to understand your options you will gain even more financial control over your health care spending.

What about you, are you properly funding your HSA account?