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Home » Health, Health Insurance, HSA's

Why I’ve Decided to Max out my HSA in 2013 & Beyond (While I can)

Last updated by on 40 Comments

Over the past year, I’ve become a big fan of HSA’s.

They are a bit like an IRA on steroids (if those steroids were purchased from tax-free HSA distributions).

Tax free (pre-tax) contributions, growth through investment, and distributions? Yeah!!

Unlike an FSA, contributions roll over from year-to-year, and they are portable, meaning you can take them with  you from one employer to another or to self-employment.

Unfortunately, I did not elect to add any personal funds outside of my employer’s HSA contributions in 2012.

That was a missed opportunity. Outside of grabbing employer 401K matching funds, there’s no more of a clear no-brainer than HSA contributions, when it comes to enhancing your financial future via savings. That’s why I’ll be continuing with my HDHP vs a PPO and taking it one step further by maxing out my HSA in 2013.

How much is the HSA contribution maximum?

Like 401K’s and IRA’s, the IRS indexes HSA contribution limits to inflation.

2013 Maximum HSA Contribution Limits

2013 maximum HSA contributionThe 2013 HSA contribution maximum contributions are set at:

  • Single Plan: $3,250 (up from $3,100)
  • Family Plan: $6,450 (up from $6,250)

As with 401K’s there is a catch up contribution for those age 55 and over. The 2013 HSA catch-up contribution is $1,000 for both single and family plans.

In most cases, you’ll have to decide your HSA contributions for the following year during your open enrollment.

HSA’s Must be Paired with a HDHP

Unfortunately, HSA’s are not available for everyone.

A high deductible health plan (HDHP) must be your form of health insurance plan in order for you to be eligible for an HSA. Per the IRS, HSA contributions are only eligible for HDHP’s that have:

  • An annual deductible of at least $1,250 for self-only coverage or $2,500 for family coverage (up from $1,200 and $2,400 in 2012); and
  • Annual out-of-pocket expense maximums (e.g., deductibles, co-payments, and other amounts, but not premiums) up to $6,250 for self-only coverage or $12,500 for family coverage (up from $6,050 and $12,100 in 2012).

Health Care Costs are Going Nowhere but Up. HSA’s are a Hedge

With our profit-driven health care model in the U.S., expenses are significantly higher than any other nation per capita and growth exceeds inflation every year. Until we move to a single payer system, there will be no relief.

So why not build as much of a cushion as possible to protect yourself from future expenses?

Why would you ever pay for medical expenses with after-tax dollars if you could avoid doing so?

As noted earlier, unlike FSA’s, HSA contributions roll over from year-to-year, and they are portable, meaning you can take them with  you from one employer to another or to self-employment.

An additional objection might be – “what if I stay healthy and don’t spend all of the funds on medical expenses?”.

When you turn 65, you can use HSA funds on not just medical expenses, but anything, without penalty.

And remember, the entire time, you can grow your contributions through investments, just like any other retirement account. With medical expenses, it’s even more important to not let inflation erode your savings.

No brainer!

If you’re interested in more on HSA’s, check out the previous links in this article or IRS publication 969. Also, check out my list of the best HSA accounts.

There are some questions about what will happen to HDHP’s and HSA’s when the new Affordable Care Act insurance requirements kick in for those over age 30, but for now, I’m going to take full advantage while I can.

HSA Discussion:

  • Will you be maxing out your HSA in 2013?
  • Do you see any downsides to HSA’s?

About the Author
I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 7,500+ others by getting FREE email updates. You'll also find every post by category & every post in order.


40 Comments »
  • Mad Fientist says:

    Another great thing about an HSA is that there isn’t a time constraint on when you need to withdraw money from it for a qualified medical expense.

    For example, if I have a $1000 medical bill, I can just use my personal checking account to pay for that expense and I can leave that $1000 to grow in my HSA, tax free, for as long as I want. Since I have a receipt for $1000 of medical expenses, I can withdraw $1000 from my HSA, tax free and penalty free, at any time in the future (as long as the medical expense occurred after opening the HSA).

    This is great for someone like me who is pursuing financial independence and is going to retire early (in my 30s) because as I incur medical expenses, I’m slowly converting my HSA from a standard retirement account to an early retirement account (i.e. an account I can take tax-free distributions from at any age), all while enjoying tax-free growth!

    • BG says:

      No, you can’t do that.

      Only “Qualified Medical Expenses” (QME) can be withdrawn from your HSA, and a QME is only valid in the YEAR the expense is PAID.

      For example, if you go to the doctor in December 2012 — but pay the bill in January 2013, then that is a “Qualified Medical Expense” for tax-year 2013. You can’t, as you imply, pay that bill in 2013 out of pocket, and then get a distribution from your HSA in 2016 (or some future year).

      This is mentioned in the language in IRS Pub 969 (talking about “Qualified Medical Expenses” for HSAs), and IRS Pub 502 defining when a “Qualified Medical Expenses” is good for:

      “You can include only the medical and dental expenses you paid this year, regardless of when the services were provided.”

      I erroneously thought the same as you a few years ago and a quick call to the IRS help line set me straight then: 1-800-829-1040

      • Mad Fientist says:

        Hi BG,

        Thanks for pointing me to those documents. I had read the IRS Pub 969, when doing research for an article that I wrote about this topic on my site, but I didn’t look at the IRS Pub 502 that you mentioned. I just looked through it now though and to me it still seems ambiguous. I can see how Pub 969 defines qualified medical expenses as “expenses that would generally qualify for the medical and dental expenses deduction”, as defined in Publication 502, and Pub 502 does say “You can include only the medical and dental expenses you paid this year” but to me, that doesn’t explicitly mean the HSA can only be used for current year expenses.

        Publication 502 describes what medical and dental expenses you can deduct on your tax return so it makes sense that you can only deduct qualified medical expenses that were paid for in the tax year that you are hoping to receive the deduction. For HSA purposes, however, just because it doesn’t fall within the current tax year doesn’t mean it wasn’t a qualified medical expense. To take a deduction, Pub 502 states that the expense has to be a qualified medical expense AND has to have been paid for in the current tax year but an HSA distribution just states that it has to be a qualified medical expense, as defined in Pub 502. To me, the date the expense was paid for is additional information and does not determine if a medical expense is a qualified medical expense.

        Saying all that though, if you actually spoke to the IRS about this, I definitely believe what you’re saying. I will give them a call to get clarification on everything and will reply to this comment with what I find out.

        • BG says:

          When I called the IRS a few years back, it was for a real example I was facing. I had roughly $8k in QMEs, but only $6k (max contributions) in the HSA. My question to them was whether I could ‘roll’ the extra $2k in QMEs into the next year and take the distribution from the HSA then (when I could add an additional $6k to the HSA again).

          The IRS agent pointed me to Pub 502 and said the best I could do in my current situation was try to delay the payments to the medical providers into the next year. Any payments I had already made in the current year would not count as a QME for HSA distributions in a future year.

          If you call the IRS and find that they have changed their position on this, that would be very good news.

        • BG says:

          OK, I stand corrected. I called the IRS again, and spoke with a representative who put me on hold a few times to research the question. She changed her mind from originally “you can’t do that” to ultimately coming to the conclusion that yes, you can ‘roll’ your QMEs into the future and take the HSA distribution at any arbitrary future time (be that years away).

          She did say, however, “unless my specific plan precludes that” — though it isn’t clear if that is my employer’s ins. plan, or the bank (HSA) trustee that could preclude us from using HSAs this way.

          Regardless, as far as the IRS is concerned, there is nothing in the rules preventing us from saving QME receipts, and deferring HSA distributions indefinitely — as long as you had an HDHP insurance plan when the expense was incurred.

          Also, though this is common sense: no ‘double-dipping’ allowed: using the same QME for multiple HSA distributions and/or using a QME that was deducted on Sched A in any tax year.

          • Mad Fientist says:

            BG, that’s great you got confirmation from the IRS! Thanks a lot for giving them another call.

            Tax documents are such a pain to interpret so that’s a great idea calling the hotline to ask questions. I’ve never thought to do that in the past, I’ve always just suffered through hours of frustrating reading instead, but I can definitely see myself using that service in the future.

  • Erik H says:

    @Mad Fientist: Sounds pretty cheeky and also rather smart.

    @Anyone else: Do you recommend any particular organization’s HSA? One with low fees, good returns, etc.?

    Thanks!

    • Colleen B says:

      I did a lot of research on this, as the admin. fees can be quite high on HSAs. Until last year, American Chartered Bank was the BEST- the ONLY one with no fees.
      Unfortunately, Select Account bought all of American Chartered’s HSA program, and they automatically moved my account. Now, of course, there’s fees. But I think Select Account has a low fee program that is “second best” to what American Chartered used to do.
      The fee structures, as I see it, are the only downside to HSAs.
      Hope this helps, and I’m still shopping for no fees- so if anyone finds anything, please post!

  • Jon says:

    @Erik I could be wrong, but I don’t think most people have a choice because their employer makes that decision. Personally, I have Fidelity and it works like a regular brokerage account with check writing and a debit card.

    • G.E. Miller says:

      My understanding is that once you leave an employer, the HSA goes with you, just like a 401K, and you can transfer it to another administrator, if you’d like.

      • P.A. Colling says:

        G.E. and ohters with questions related to portability and custodial choice:
        * YES! you can choose the custodian (bank), regardless of the suggestion made by your healthplan admin.
        * The only barrier that you may have is that your employer goes with one bank specifically to streamline deposits, but you can also open an account with ANY OTHER bank you would like, and then sweep the funds.
        * The lasw says that you may own as many HSA products as you woul like at as many different banks as you would like, but that you cannot contribute more than the maximum spread over all accounts. In other words, you could, as a single covered person, contribute $2000 to one HSA, and the balance for the tax year to another.
        * Good custodians are out there; do the research and you will find them. I run an excellent program through Blackhawk Bank in WI, and have had an HSA myself for 7 years. LOVE IT!

  • Ron Ablang says:

    I first opened my HSA in the beginning of 2010 and maxed it out from the get go. $6150/year for a family. I figure it reduces my federal taxable income. No downsides for me.

    My HSA is w/ Wells Fargo, which is offered by the Kaiser Permanente through my work.

  • AdamO says:

    How does the investment piece work? My HSA is through M&I (BMO Harris), I wasn’t aware I could invest that money.

  • Natalie H says:

    Double bonus if your employer offers payroll deduction. Mine does and we don’t have to pay FICA on the amount we contribute to our HSA.

    Unfortunately my employer works with optumhealthbank. I would not recommend them, but they do have low fees. I pay about $2/month in fees and this is waived if you have over a certain amount ($5000?). Looking long term I would look for a bank that has good investment options, is easy to manage online, and waive the fee if you have a large amount invested. The $3-5/mo you pay for the first couple of years will not be very much compared to your ability to invest the money well.

  • JC says:

    “Until we move to a single payer system, there will be no relief.”

    Yup – cheaper health care costs for some, higher taxes for all, and a reduction in the quality of care.

  • Tim says:

    G.E. Miller…

    I agree and love my HSA for all the reasons you and others have stated. Mine is not thru Fidelity and they have a slew of options for investing there like most others…

    I did want to just comment as you mentioned Maxing in 2013… If you have the money set aside somewhere.. why not Max it in 2012? You can make individual contribution outside of payroll… at least all the HSAs I’ve had I was able to do so.

    Cheers!!

  • Vrinda says:

    Love your website, I can see you are passionate about personal finance, and are eager to share the knowledge you have accumulated. THANK YOU!

  • Kevin @ Ask for Benefits says:

    I am working with a client right now to install their HSA. Most employees are a little reluctant to jump in. Their concern is what happens if someone in the family has a medical need. An HSA is great while people are healthy.

    The employer addressed this by paying for supplemental insurance, which makes payments directly to the employees. Since most HSA’s will cap the maximum out of pocket expense (moop), someone experiencing a medical problem may come out ahead of the game. The benefits from the supplemental policies can be much more than the moop.

    People can pair their HSA with supplemental coverage as a hedge. Many are HSA compliant.

    • Tim says:

      Kevin,

      I agree. As a very athletic and healthy person it was an easy answer for me.. I did the an directed the drop in my premiums from going to a traditional to an HSA into my HSA… and now 3 years later.. I have almost $8K in my HSA more than double enough to cover my out of pocket max for 2 separate years..

      People need to evaluate their situation and figure out how much they pay in co pays and premiums and see if the trade off will work out better.

      If you are light user of a very heavy user of health care the HSA is generally better… The people in the middle it is a smaller trade off.

    • P.A. Colling says:

      HSAs can be great whether a person is healthy or not; that said, there is no “magic bullet” that will cure the system itself. When my clients talk about “worst case scenario” during benefit meetings I am careful to make sure they are actually doing real math when it comes to real world situations. Most people will immediately look at the deductible amount, then go straight to “what if…” and stop there without the proper guidance to crunch the #’s.

      You must make sure they add up premium differential, out of pocket things that go toward nothing w/ traditional PPOs like co-pays, as well as really understanding their untilization (w/ an anecdotal look-back through EOB’s instead of just guessing. They also need to think about paying for healthcare with post-tax $’s with the traditional plans, which effectively adds 30% to the cost for most people. They need to understand the out of pocket for the coinsurance exposure with each option (many HSA qualified plans are 100%), and that ALL qualified plans allow one family member to meet the deductible. Lastly, they need to make sure to factor in any contributions made by an employer.

      More often than not, I see folks saving $; and finally, for the first time in many cases, understanding how their insurance works.

  • Kirby says:

    One of the greatest features about the HSA is the avoidance of FICA taxes for payroll deductions. It is a great way to save for retirement since (as you mentioned) you can use it after age 65 for any expenses and avoid the penalty. Although if you do not use it for medical expenses at that time, then you would still have to pay income taxes on the distribution. It then becomes just like a traditional 401(k) except you never had to pay FICA on the money!

    Especially if you are past the 401(k) employer match, then $1,000 in an HSA saves over $50 in FICA taxes compared to the same (based on current SS and Medicare rates) $1,000 had it been saved in a 401(k).

    • Gina says:

      Does not paying FICA on the money put in an HSA decrease your potential social security retirement benefits?

      • Kirby says:

        Since it lowers your Social Security wages, I would imagine that it would potentially reduce your Social Security benefits later down the road. However, by saving the money in the HSA and letting it grow (especially if you can have the account tied to an investment/brokerage account), it would seem that you would end up with a better deal long-term to have saved the FICA taxes up-front as opposed to having that money taxed and later included in the Social Security calculation in the future (especially since it’s anybody’s guess what formula or methodology they might be using at that point in the future).

  • Chris in Boston says:

    2012 was the first year for my HDHP +HSA plan.

    I chose to max out my HSA in 2012 and will do so again in 2013.

    I did meet my HDHP out of pocket maximum in 2012 of $4,400. I did not take any cash out of my HSA to fund my out of pocket deductibles. I just let my HSA grow.

    Is it possible… to take a distribution of the $4,400 from my HSA (Tax free because it offsets my actual out of pocket QME’s for 2012) and then deposit that $4,400 into a different HSA account?

    The reason I would want to do this is that my current HSA through my employer is managed by JPMorgan Chase Bank, and I have limited investment options. If I were able to roll the funds over to an HSA I set up myself, I can then have a much wider range of investment options to choose from.

    I know that I am eligible to take the distribution of $4,400 and spend it or invest it. Doing that I lose the long term tax deferment. If I could roll it into a new HSA and let it continue to grow tax deferred (Tax free if used for QME’s) that would be ideal.

    Thoughts?

  • Rebekah says:

    Question- I have an HSA and my employer (in 2013) is contributing to it out of their pocket, on my behalf ($3225). I am going to withdraw $3200 (in 2013) to pay off my LASIK loan.. once I empty the account can I contribute another $2K from my paycheck (in 2013) or am I limited to putting in $25 in until 2014 since my employer already put in $3225? Hope that makes sense. Thanks!

  • Rebekah says:

    Part 2 Q after reading some of the above comments..

    I had LASIK in 2012 and took out a small interest free loan through “carecredit” (ie. GE Bank credit card for medical expenses).

    My HSA will be funded in 2013. Can I take the money from the HSA to pay off the loan even though the procedure was done in 2012?

    Thanks!

    • Mad Fientist says:

      Hi Rebekah,

      The way I understand it, you would NOT be able to pay for the loan with HSA money if the procedure took place prior to you opening the HSA. I’m not familiar with CareCredit, but I’d be surprised if you could use your HSA for any expenses that occurred prior to you opening the account.

      As far as your contribution limit is concerned, employer contributions count towards your contribution limit so you’d only be able to add an additional $25 in the example you provided.

  • chartsell says:

    GE,

    Thanks for the info! Perhaps you can help me with a specific scenario:

    My employer offers an FSA but not an HSA. Can I have an employer based FSA and an individual HSA with this specific arrangement?:

    Company FSA pays 1) my wife’s PPO premium, 2) my personal HSA premium.

    The HR director is looking into this as well, but perhaps you’ve already got the beta.

    Cheers,
    ch

    • chartsell says:

      * For clarification, “company FSA pays” = contributions into FSA are automatically deducted from my wages and I’m reimbursed later at a pre-tax benefit.

      My concern is whether or not I can use an employer FSA for one or both of the items listed above while also having a personal HSA.

      Thanks again,
      ch

      • Kirby says:

        Nope, you can’t do that. A person can only participate in an FSA OR an HSA and not both at the same time.

        • Jay says:

          Not true. You can have an HSA and an HSA compatible FSA.

          There are certain types of FSA’s w/extra restrictions that allow you to have both the FSA and an HSA.

          • Kirby says:

            Yes, that’s true in limited FSA circumstances. You can have an HSA if you have a limited FSA that only covers: limited purpose (dental, vision or preventive care) or to cover expenses after the plan deductible is met. Note too that if your spouse is covered by an FSA at work that could cover any of your expenses prior to meeting your deductible, then you won’t be able to contribute to an HSA.

  • tommy says:

    I just opened a HSA and think it will be a great financial tool. My questions is – can i max out my HSA (3,100) AND my traditional IRA (5,000) in the same tax year (i dont have a 401k)? Or, can i max out my HSA and my Roth IRA in the same year?

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