Health Savings Accounts, or HSAs, are tax-advantaged accounts American can use for medical expenses. They can also save employers on health insurance costs.
However, HSAs have many benefits beyond cost savings.
Here’s what you need to know about HSAs, HSA contribution limits and why it’s a good idea to max out your annual HSA contributions.
Table of Contents
What is a Health Savings Account?
Health Savings Accounts are tax-advantaged savings accounts explicitly for health care spending. Yearly HSA contributions are tax-deductible and grow tax-free. Withdrawals are also tax-free when you use the money for qualified medical expenses.
In essence, a Health Savings Account is very similar to a combination of a Traditional IRA (tax deductible when you contribute) and a Roth IRA (no taxes on qualified withdrawals for medical expenses).
Health Savings Account Eligibility
You must participate in a qualifying High-Deductible Health Plan (HDHP) to be eligible for an HSA.
In 2022, a plan may qualify as an HDHP if the deductibles are $1,400 per year or higher for individuals, or $2,800 per year or higher for a family plan.
In 2023, A plan qualifies as an HDHP if its deductibles are at least:
- $1,500 per year for individuals
- $3,000 for families
These deductibles are higher than average, hence the name, High-Deductible Health Plan.
IRS rules for HDHP also limit out-of-pocket expenses. For 2022, these limits are $7,050 for self-coverage only and up to $14,100 for family coverage.
In 2023, HDHP out-of-pocket expenses cannot exceed:
- $7,500 for individuals
- $15,000 for families.
HDHP Advantages
Employers may offer high deductible plans for enrollees who prefer to pay a lower monthly premium.
Higher deductibles can save policyholders money if they don’t go to the doctor often. The HSA option incentivize policyholders to become smarter with their healthcare spending by planning ahead for it with a pre-tax HSA.
However, you must save enough to pay the entire deductible, if necessary. Only choose an HDHP if you have some money set aside in an emergency fund or cash savings.
Tax Advantages of Health Savings Accounts
You can set aside pre-tax income in an HSA for use specifically on health spending, just like with a Flexible Spending Account (FSA).
However, HSAs have a key advantage over FSAs.
With an FSA, if you do not spend the funds in your account by the end of the year, you forfeit the remaining balance to the plan administrator.
With an HSA, you never lose the funds. You can set aside money this year in an HSA and use it 40 years from now. You can even pay for health care costs out of pocket now, and use your HSA to save for medical costs in retirement.
As long as the funds are used for healthcare spending, you won’t pay any tax on the withdrawals.
2023 HSA Contribution Limits
How much money can you set aside for future healthcare spending with an HSA?
The maximum annual contribution depends on whether you are on an individual or family plan. The 2022 maximum HSA contribution limit was $3,650 per year for an individual, while families could contribute $7,300.
In 2023, individuals can contribute $3,850 and families can contribute $7,750.
If you’re 55 or older, you can make $1,000 in catch-up contributions.
Note: Catch-up contributions for retirement accounts start at age 50.
You can contribute to this year’s HSA through April 15 of next year.
Here is a list of contribution limits from recent years, including the HSA contribution limits from 2010 – 2023:
| Tax Year | Individual | Family | Catch-Up Contributions (age 55 and over) |
|---|---|---|---|
| 2023 | $3,850 | $7,750 | $1,000 |
| 2022 | $3,650 | $7,300 | $1,000 |
| 2021 | $3,600 | $7,200 | $1,000 |
| 2020 | $3,550 | $7,100 | $1,000 |
| 2019 | $3,500 | $7,000 | $1,000 |
| 2018 | $3,450 | $6,900 | $1,000 |
| 2017 | $3,400 | $6,750 | $1,000 |
| 2016 | $3,350 | $6,750 | $1,000 |
| 2015 | $3,350 | $6,650 | $1,000 |
| 2014 | $3,300 | $6,550 | $1,000 |
| 2013 | $3,250 | $6,450 | $1,000 |
| 2012 | $3,100 | $6,250 | $1,000 |
| 2011 | $3,050 | $6,150 | $1,000 |
| 2010 | $3,050 | $6,150 | $1,000 |
What Happens If I Contribute Too Much to an HSA?
If you are automatically contributing funds to your HSA through payroll deductions, it won’t be possible to contribute too much to aHealth Savings Account. However, it is possible to over-contribute by making deposits outside of the payroll system.
If you discover you have contributed too much to your HSA, you must take action to avoid paying penalties to the IRS.
Remove any excess funds you contributed, plus any interest earned on that amount. You must pay tax on this withdrawal before April 15 of the following year.
If you fail to remove the excess contribution by the April 15 deadline, you must pay a 6% excise tax when you withdraw the funds later. Additionally, if you leave the funds in your account indefinitely, you must pay the 6% tax each year.
Alternately, you can leave the contribution in, but avoid the 6% excise tax by lowering the next year’s contribution by the amount of the over-contribution.
For example, If you had an HSA contribution limit of $3,650 in 2022, but paid $3,750, you would have contributed $100.
You could avoid paying the 6% excise tax by only contributing $3,550 next year (the 2022 $3,650 contribution limit minus $100). If you contributed the full $3,650 next year, you’d have to pay the 6% tax on the original $100 over-contribution.
Can You Contribute If You Aren’t Eligible for the Entire Year?
Rarely do you start a new job on Jan. 1 or end it on Dec. 31. The date you gain and lose access to a high deductible health plan impacts your eligibility to contribute to an HSA.
Here is what the IRS says about gray area HDHP enrollees:
- The last-month rule allows eligible individuals to make a full contribution for the year, even if they were not a qualified individual for the entire year. Individuals can make the total contribution for the year if:
- They are eligible individuals on the first day of last month of their taxable year. For calendar taxpayers, this is Dec. 1).
- They remain qualified individuals during the testing period. (Dec. 1 of the current year to Dec. 31 of the following year).
- If the taxpayer does not qualify to contribute the full amount for the year, the contribution is determined by using the sum of the monthly contribution limits rule.
OR
- Sum of the monthly contribution limits rule (use Limitation Chart and Worksheet in Form 8889 Instructions). This rule uses the sum of your monthly contributions, which is the amount determined separately for each month based on eligibility and HDHP coverage on the first day of each month, plus catch-up contributions. For this purpose, the monthly limit is 1/12 of the annual contribution limit, as calculated on the limitation chart and worksheet.
In other words, you can contribute the full amount if you are eligible as of Dec. 1 of the calendar year. However, you may owe back taxes if you do not remain eligible from Jan. 1 to Dec. 31 of the following year.
Pro-Rated Contribution Rules Explained
You can avoid tax problems with your HSA by pro-rating you contributions.
- First, divide your contribution limit by 12 to get your monthly contribution limit. For individuals, it is $304.16 and for families $608.33 (both numbers represent the 2022 tax year; use the current tax year’s contribution limit when calculating for your situation). Remember, each month that you had at least one day active in an HDHP counts as a full month for your contribution limit.
- Next, multiply the number of months you were active in the health plan by your monthly contribution limit. For example, if you started a new job and gained access to an HDHP on March 12 and maintained HDHP coverage through Dec. 31, you would have 10 months of pro-rated contribution availability. In this situation, you could contribute $304.16 x 10 = $3,041.60 for 2022. If you contributed the full amount of $3,650, you would need remove and pay taxes on the excess or reduce your 2023 contribution to avoid an HSA overcontribution penalty.
IRS Publication 969 has more info about HSA qualifications, contribution limits, distribution rules, and more.
Benefits of Maxing Out Your HSA Account Each Year
There are numerous advantages to having an HSA. You receive an immediate tax benefit when you start making contributions. And, your savings never expire. You can save the funds in your HSA or a linked investment account, and let your savings and investments grow over time.
Using Your HSA as a Super Retirement Account
Health Savings Accounts combine the best of the Traditional IRA and Roth IRA. Contributions are tax-deductible in the year you make them (like a Traditional IRA). The earnings and withdrawals are tax-free (like a Roth IRA) as long as you use them for qualifying medical expenses.
HSAs don’t have an age limit. You can let your money ride until you need it, even if that’s after you retire.
What If You Want to Use Your HSA for Non-Qualifying Medical Expenses?
If use HSA funds for anything other than a qualifying medical expense, you must pay taxes and a 20% early withdrawal penalty (early withdrawal penalties for retirement accounts are 10%).
However, the rules change a little bit once you turn age 65. Once you reach age 65, the current tax rules allow you to make non-qualifying withdrawals from your HSA with the same tax rules as a Traditional IRA.
So you would pay taxes on the withdrawals, but you would not pay any penalties. This flexibility makes your HSA one of your toolbox’s most powerful financial tools.
Benefits of Long-Term HSA Ownership
I maximized my HSA contributions each year I was eligible to contribute to an HSA. To take advantage of the investment opportunities through the HSA, we elected to pay our medical costs out of pocket and continue investing the HSA funds.
My health insurance plan has since changed, and I am no longer eligible to contribute to an HSA plan. However, I am not required to remove those funds until I decide to use them for medical expenses, or decide to withdraw the funds for other purposes.
Since the funds are invested, I’d like to let them compound as long as possible. If we have a major medical expense, I can elect to pay for them with our HSA savings if necessary. If we’re lucky and don’t have any expenses we can’t pay out of our cash flow or savings; then I will have a large investment account I can tap into when I reach retirement age.
Where to Open an HSA Investment Account
You first need to qualify for an HSA with a compatible High Deductible Health Care Plan. Check with your employer if you have an employer-sponsored health care plan.
If not, then you may be able to purchase a qualifying HDHP on the ACA exchange. You could also find one through a health insurance company such as eHealthInsurance (this is where I always found our health care plans after I became self-employed).
Once you have a qualifying health care plan, shop around for different banks or investment accounts that offer HSAs. I wrote an article about the process of opening an HSA account, which bank I chose, and why.
I decided to open my HSA account with HSA Bank, in part because they have easy access, low fees, and they make it very easy to invest your funds through a brokerage. The bank will waive its fees if you maintain a certain minimum in your account.
HSA Bank offers two investment options. Lively and TD Ameritrade. I chose to invest with TD Ameritrade, because of its excellent reputation and access to several hundred fee-free ETFs for trading.
Conclusion
Health Savings Accounts are one of the most flexible financial accounts you can open. If you are eligible to open an HSA, I recommend maxing out your contributions each year.
If you can swing it, try to pay your medical expenses out of pocket to let your HSA contributions grow tax-free indefinitely, increasing your net worth.
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Allen says
I may only have capital gains income this year, which as I understand it, is not lowered by HSA contributions. So that prompts another question:
If I make contributions in a year using post-tax money, which mine would be for this year, is it still subject to income taxes if withdrawn later for something other than a medical expense?
Patrick Hanna says
I have an unusual situation. My employer’s health plans run from July through June, not January through December. For the plan year 7/1/18 – 6/30/19 I am on an HSA eligible plan that covers my daughter and myself. My wife is on her own non-HSA plan. We contributed the maximum amount for 2019 ($7,000) back in March and have since spent it on eligible medical expenses.
Beginning July 1, 2019 my employer is going to be offering a plan where my employer pays all deductibles and co-insurance which means that the plan is not HSA eligible. Normally, I would just withdraw the $3,500 from the HSA and pay the taxes on it, but I can’t since that money is already spent. Is there any way I can avoid paying the 10% penalty on the portion that I am not eligible to contribute in 2019?
Ryan Guina says
Patrick, contact your plan administrator or a tax professional. It may be possible to recharacterize the contribution in some way. However, I am not certain what the details would be or if this is possible. A tax professional can provide more specific guidance. Best wishes!
Debra says
I also wanted to know if you can add $2000 for the catch up if two people are over 55. It mentioned it on Lively but I have not seen that anywhere else.
Linda Cerny says
Can we use my HSA payouts for medical/dental reasons for both me and my husband even though it is my name only? It was offered through my work and my husband didn’t contribute, but we would like to use some of it for his dental issues. Is this acceptable?
Ryan Guina says
Hello Linda, if the HSA is a family account, then yes, you can use it for yourself or anyone in your immediate family. This would include yourself, a spouse, and any dependent children.
David says
Hi Ryan,
I’ve encountered information in various places online which seem to say that if I make a mid-year HSA contribution in Year 1 (example: 2019), I also need to remain HSA eligible in Year 2 (example: 2020) in order to avoid some kind of penalty. I find this confusing, and I have not been able to nail down any clear information about this. I want to max out my HSA in 2019 (yes, I am eligible this year). However, it is likely I will NOT have an HSA-eligible health plan in 2020. I want to make HSA contributions in 2019 (while I am eligible), and I hope to use that money without penalty for medical expenses in 2020.
Thanks for your feedback!
David
Ryan Guina says
Hello David, I haven’t heard this before. I would ask your plan administrator for more specific information. Also, if you are eligible for part of a calendar year, you can contribute a prorated amount of the annual contribution (just divide the total amount you would otherwise be eligible to contribute for the entire year by the number of months you participate in the plan). Best wishes!
Matt Lawhorn says
Should I be able to adjust my contribution amount through my employer? I misjudged the amount of annual contribution by $1000 short of max and would like to correct during the remaining months. Or would this be subject to ‘open enrollment’ period rules?
Thanks,
Ryan Guina says
Matt, contact your HR department. You should be able to change your contribution amount if you are contributing through payroll deductions. The “open enrollment” period is only for signing up for the health care plan. It shouldn’t cover your contribution amount. Best wishes!
Daniel S says
Good information! Whatever you do, do NOT use BenefitWallet. They are the absolute worst. Terrible customer service. Fidelity has a great HSA. Easy to open an account and transfer funds, etc. Obviously great customer service as well.
DOUGLAS ERNST says
RE: Catch-Up Contributions – For age over 55, is this used once when an HSA is started or can it be used repeatedly?
Ryan Guina says
The catch-up contributions can be made once per year, so long as you are eligible to contribute to an HSA.
Roger Marrero says
If both married parties are over 55 is one allowed to add $1000 to the 6900 limit for 2018 per party ($8900) or $1000 for both ($7900) even if both parties are over 55?
Lynda McGinnis says
Is it better to choose a health insurance plan compatible with HSA and pay higher premium? Or better to lower the monthly premium and not have HSA compatible account?
Ryan Guina says
Lynda, each individual needs to run the math to determine which option is better for their needs. What I have done in the past is built out a quick spreadsheet that includes each plan name, monthly premiums, out of pocket max, and other details. Then I ran several scenarios based on estimated medical expenses. Running these types of calculations shows you how much you may possibly have to spend if you need to use the service. You can make these estimates easier if you have known medical needs, or if you can use previous years’ expenses as estimates for future needs.
In my situation, I went with HSA compatible plans, based on the options available to me at the time. But each person will have different available options, each with its own price point for premiums, out of pocket expenses, etc. So the only way to know is to run the numbers.
S Hayenne says
What is the corrective action to making an ineligible contribution due to ineligible health plan? (not an excess contribution situation). What is the penalty? Can I just withdraw the money? What if the money was put in an investment account? Does that interest need to be paid back?
Ryan Guina says
You should contact your HSA provider – they should have a procedure for withdrawing the amount. You will have to pay taxes on the interest. But I’m not sure if there will be any penalties if you correct the action before you file taxes. A good accountant or tax professional should be able to help you here. And this is a situation when it will be worth hiring professional help when filing your taxes – doing this right the first time could possibly save you more than the cost of hiring a professional!
Dividend Driven says
So far I like the HSA and I’m using it as another saving vehicle long term. Last year was my first year maxing out an HSA. I will continue to max it out annually. I invest the money above the required $2,000 that must remain in cash. I like the tax advantages of it and hope in retirement more and more items qualify to use the funds if needed.