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Maximize your Health Savings Account (HSA)

Introduction

The Mad Fientist considers the HSA the Ultimate Retirement Account. Please go read the page to understand the details.

I partially agree. It depends on your health insurance concerns as well. Having an HSA means that you have a High Deductible Health Insurance Plan, which means that you are probably paying a large amount out of pockets for your health needs.

If you do have an HSA, like I do. There are a few tricks to perform before the tax filing deadline.  If you think this is a good deal for you, then make sure you maximize your HSA.

Maximizing HSA Contributions

I set up the maximum contribution amounts to my HSA this year through my employer, and I thought that was it and I was done.

But it turns out I was wrong. The employer health insurance plan goes from April 1st to March 31st. As such, I only contributed to the HSA for 9 months in the tax year, not 12 months.

There is a catch however! Normally, your maximum contribution is pro-rated to the amount of months you were eligible during the year. This means you wouldn’t be allowed to perform this extra contribution. However, there is something called the Last Month Rule which allows you to contribute the full amount for the year, if you were HSA eligible on December 1st… if you stay eligible through the whole 12 months of the following next year.

In other words, if you believe you will be HSA eligible for the complete next year (12 months), then you can maximize the contribution for the current year. If you were to become HSA non-eligible for any month during the next year, then the IRS will run after you and impose you 6% penalties on the extra contributions until you remove them.

Your HSA custodian will send you form 5498-SA which contains the HSA contribution amount (you + employer) for the tax year. In my case, this amount was $5,188.34.

Now read the following contribution limits:

For the 2020 tax year, the maximum contribution for eligible participants with individual (or single) coverage is $3,550.00, and the maximum contribution for eligible participants with family coverage is $7,100.00. Any account holder age 55 or older (and not yet enrolled in Medicare) can make an additional “catch-up” contribution of up to $1,000.00.

For the 2021 tax year, the maximum contribution for eligible participants with individual (or single) coverage is $3,600.00, and the maximum contribution for eligible participants with family coverage is $7,200.00. Any account holder age 55 or older (and not yet enrolled in Medicare) can make an additional “catch-up” contribution of up to $1,000.00.

I am on the family coverage plan, this means that I am missing on $7,100-$5,188.34=$1911.66 contribution!

You have until tax deadline (April 15) to perform previous year contributions.

Even though these contributions are done with post-tax money, they are fully income deductible and will be stored in your HSA as pre-tax income. 

So hop off on your HSA web-site and maximize those! Make sure to select the appropriate tax year when performing the contribution.

Lessons Learned

Two lessons learned from this adventure. 

The first one, is dotting the i’s and crossing your t’s by reviewing and doing your taxes early. In my personal case, I would have missed on close to $2000 of post-taxed advantage investment, including tax-free growth for +25 years.

The second lesson learned is looking at your employer pay-check stubs to make sure that the contribution amounts will be equal to the maximum allowed in the year. In my case, the pay stub doesn’t show the employer contributions, so make sure to take them into account when performing the calculation.

In my case, I would have also been able to contribute earlier by setting up recurring investments from my checking accounts to make up for the missing amount instead of doing a lump sum payment at the end of the year. I missed on the growth of these HSA investments.

Note: You don’t want to over-contribute, as there are penalties, so you will probably want to put a slightly lower amount to be on the safe-side, and then perform the final lump-sum contribution at the end of the year.

Conclusion

Taxes can be fun, especially when they save you money!

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