The HSA Contribution Deadline
Until recently, I assumed that because my employer made payroll deductions for my HSA only through the end of the year, that the deadline for all HSA contributions was the end of the calendar year. That’s not the case. Contrary to popular belief, you can contribute to an HSA outside of an employer’s payroll deductions, and you can do it beyond the calendar year, up until the tax deadline.
Beyond providing additional time to save and contribute funds, this extended HSA deadline gives you even more opportunity to reduce your tax obligation at the last minute, while completing your tax return.
The fact that you have the option of contributing to both an IRA and/or HSA right up until the tax deadline is great, but it provides some interesting scenarios that get a bit complex.
Should you Make an HSA Contribution or an IRA Contribution?
HSA contributions, like Traditional IRA contributions, are tax deductible, so long as you meet the HDHP requirements.
If you’re not eligible for an HSA through a qualified health plan, that makes your choice simple – contribute to an IRA.
If you’re not eligible for a deductible Traditional IRA contribution, due to IRA income limits for those with an employer-sponsored plan (such as a 401K) in the household – contribute to an HSA.
If you’re eligible for both, then what?
HSA and Traditional IRA contributions are both “above the line”, which means that you can claim a tax deduction for them even if you do not itemize your taxes and you take the standard deduction instead. Contributions to either will reduce your adjusted gross income on a dollar-per-dollar basis. So, this criteria is a wash.
All else being equal, HSA’s are superior to IRA’s because withdrawals for qualified medical expenses are tax-free (similar to Roth IRA withdrawals). Tax deduction and tax free withdrawals – you can’t beat that. This is why HSA’s are my favorite type of retirement account.
HSA contributions, however, are not eligible for the Saver’s Credit because they aren’t officially recognized by the IRS as a retirement account, like a 401K or IRA is (even though you can withdraw HSA funds for anything starting at age 65). The Saver’s Credit is a government funded tax credit that matches a percentage of your retirement contribution, up to 50%.
So you’re left with a choice if you haven’t made Saver’s Credit eligible contributions already: tax-free withdrawals for qualified medical expenses (with HSA contributions) versus getting the Saver’s Credit (with IRA contributions).
Here are the tables for the IRA contributions:
As a general rule, if you are eligible for a 20% or 50% Saver’s Tax Credit, choosing to contribute to the IRA over the HSA is probably the better move because your tax credit rate on your IRA contribution will be higher than your tax rate.
If you are eligible for a 10% Saver’s Tax Credit (or no credit at all), choosing to contribute to the HSA over the IRA is probably the better move because your tax credit rate on an IRA contribution would be lower than your tax rate.
How to Make an HSA Contribution Before the Deadline for the Previous Year
To make an HSA contribution for the previous year, you simply choose which year you would like to apply the contribution to within your HSA account.
If you didn’t know that all of this was a thing, don’t feel bad, you’re not alone. Only 20.2 million Americans have an HSA, and far fewer know that you can contribute to an IRA outside of payroll.
For more information, refer to the links in this article or IRS publication 969.
Have a last-minute tax-saving HSA contribution success story? Please share in the comments!