Should I Max Out My HSA Contributions?

What Is an HSA?

An HSA is a tax-advantaged savings account that can make health care costs more manageable. Contributions are made with pretax income and can be withdrawn tax-free for qualified medical expenses, including health insurance deductibles, dental and vision care, prescriptions and more. HSA funds never expire and can even pay for qualified medical expenses for your spouse and dependents, even if they aren't on your health insurance plan.

HSAs are similar to flexible spending accounts (FSAs), but FSAs are only available through your employer. HSAs might be offered by your employer, and your employer may even contribute to it, but you can open an HSA yourself with a financial institution that serves as an HSA trustee. Other individuals, such as family members, can also contribute to an eligible person's HSA.

Who's Eligible for an HSA?

You can only contribute to an HSA if you meet certain requirements, such as:

• You participate in a high-deductible health insurance plan (HDHP). For the 2023 tax year, the IRS defines HDHPs as health plans with a deductible of $1,500 or more for an individual or $3,000 or more for a family.
• You have no other health insurance coverage, including Medicare (there are exceptions for specialized health coverage such as dental, vision and long-term care insurance).
• Nobody else can claim you as a dependent on their tax return.

If you have an HDHP but your spouse doesn't, you can still be eligible as long as you aren't covered by their health insurance.

What Are Contribution Limits for HSAs?

Limits typically increase annually, and they can vary in certain circumstances. For 2024, generally individuals with an HDHP can contribute up to $4,150 per year, and families can contribute up to $8,300, according to the IRS.

Eligible adults ages 55 and older at the end of the tax year can contribute an additional $1,000 annually to catch up—as long as they're not enrolled in Medicare.

These limits don't only apply to contributions made by you. If your employer or any loved ones contribute to your HSA, these typically count toward your annual maximum contribution limit.

HSAs Have Triple Tax Advantages

Despite their rules, HSAs are compelling financial tools due to threefold tax benefits:

1. Tax-free contributions: You can contribute to an HSA through pretax payroll deductions or deduct your contributions on your federal income taxes. If your employer contributes to your HSA, the amount may be excluded from your gross income, which also reduces your taxable income.
2. Tax-free growth: Some HSAs accrue interest like a savings account, and others allow account holders to invest some of their HSA contributions in the stock market. Interest, dividends or capital gains on your HSA are not taxed.
3. Tax-free withdrawals: You can withdraw the money from an HSA tax-free, as long as it's for qualified medical expenses.

Pros and Cons of Maxing Out Your HSA

Whether you max out your HSA is a personal decision that comes with both benefits and drawbacks. Here are some of the pros and cons to consider as you weigh your options.

Pros

• Zero income tax on contributions: Money put into an HSA via payroll deduction is pretax; if you put money into an HSA that's not pretax, it's usually tax-deductible.
• Tax-free earnings: If your account earns interest or grows from investing the HSA funds, you don't pay federal income tax on the gains.
• Medical expenses made tax-free: When you have a qualified medical expense, whether it's a costly hospital stay, a prescription or even your insurance deductible, you can pull the money from your HSA and pay zero federal taxes.
• A safety net for medical needs: HDHPs have lower premiums than traditional health insurance due to their high deductibles. While your HSA can't pay your premiums, it exists as an emergency fund for health care, and maxing it out can leave you better prepared for large out-of-pocket medical bills.
• No spending deadline: Unlike FSAs, HSAs aren't attached to an employer, so if you maxed out your account and plan to leave your job, you don't have to urgently spend your balance. It can feel like wasted money if you've over-contributed and must use your funds on things you don't really need. Since HSAs never expire, and they go with you—whether to a different job or into retirement—you can max out without fear of losing your contributions.

Learn more >> What's the Difference Between an HSA and an FSA?

Cons

• Restrictions on investing: Not all HSA providers allow you to invest your account funds for additional growth. Those that do may have requirements such as keeping a minimum cash balance or restricting how much you can invest.
• Sacrificing other financial goals: If you have the spare money, there's nothing wrong with maxing out your HSA. But if you're behind on other financial goals, like paying off student loans or saving for a down payment, you might want to tackle those first and make smaller HSA contributions.
• Steep penalties for early withdrawals: If you've maxed out your HSA, you risk later needing or wanting that money for something besides medical expenses (say a house down payment or emergency vet bill). Should you withdraw money for nonqualified expenses before age 65, you'll have to pay ordinary income tax on it, plus a 20% penalty for the early withdrawal. After age 65, if you use the money for nonqualified expenses, you'll no longer owe that 20% penalty, but you'll still pay ordinary income tax, just like with a 401(k) or IRA.

Should You Max Out Your HSA?

Not everyone qualifies for an HSA or wants the required high deductible plan. But if you do, an HSA's compelling tax benefits might make you wonder if you should contribute the maximum amount allowed.

With an FSA, maxing out can be risky since unused funds expire each year, and accounts are tied to that employer. HSAs don't have either concern: You can max out your contributions without the risk of losing the money. Even if you're no longer eligible to contribute, you can still access funds anytime, which might leave you more prepared for the health costs as you age (Medicare doesn't cover everything).

There is a risk of saving more than you need, and later wanting that money for other purposes. You can't withdraw that money penalty-free until after age 65, and even then, you'll still owe taxes on non-qualified expenses.

So be wary of putting all your eggs in one basket and maxing out your HSA at the expense of other financial goals. If your employer offers a 401(k) match and you're not contributing enough to nab some or all of it, it could be worth pursuing that before going all in on your HSA. While health expenses are likely to arise eventually, your need for retirement money might be more certain and critical.

Make sure you're also not sacrificing other savings goals, like building an emergency fund, a sinking fund for an important expense or an IRA. It's also important to consider if you have any high-interest debt or large balances that should get priority. Maxing out an HSA isn't a bad idea in and of itself, but it might not make sense until you've met, or are close to meeting, your other financial goals. Until then, smaller contributions could work better for your overall financial health.

The Bottom Line

Medical expenses are inevitable, so it could be a smart strategy to max out an HSA, especially since you don't risk losing the money and can take full advantage of the tax benefits.

Just be cautious about prioritizing maxing out your HSA if you have other financial needs that could make better use of that cash. Once you're in a good spot with your other expenses, debts and goals, it's less risky to start maxing out an HSA.