If your employer allows it, should you front-load your HSA contributions to the maximum HSA contribution levels at the beginning of the year? To answer that, let’s first review what I wrote on whether or not it makes sense to front-load your 401K. Note: in the case of 401Ks, “front-loading” is the process of ramping up your 401K contributions to high levels in order to hit the maximum 401k contribution early in the year versus evenly distributing contributions over the course of the year (if your employer allows you to do so – as not all do).
For starters, historically, market indexes go up over time. And as such, the odds are in your favor that markets will be higher towards the end of the year than at the beginning of the year. If you front-load, you could catch more of the gains. In the last 35 years of the S&P 500, for example,
- 1st half noticeably higher: 1990, 1992, 1998, 2001, 2002, 2008, 2011, 2015, 2018, 2022 (10 total years)
- 2nd half noticeably higher: 1989, 1993, 1995, 1996, 1997, 1999, 2003, 2006, 2007, 2009, 2010, 2013, 2014, 2016, 2017, 2019, 2020, 2021, 2023 (19 total years)
- roughly even: 1991, 1994, 2000, 2004, 2005, 2012 (6 total years)
That’s almost a 2-to-1 ratio of higher 2nd half versus higher 1st half index levels.
An even more compelling reason to front-load is the benefit of capturing matching funds before leaving an employer. If you think you might retire, go on a sabbatical, get laid off, or take another job with a lesser or zero 401K match, you want to be able to lock in as much 401K matching funds as possible, because it’s free money. And if you get another job with a better 401K match, you can always over-contribute to your 401K (against the IRS maximum) and then withdraw excess contributions to the lesser matching of the two employer 401Ks.
So, in many ways, the answer to whether you should front-load 401Ks is emphatically “yes”.
Should you Front-Load your HSA Contributions?
But what about HSAs? Should you front-load your HSA contributions, similar to 401Ks?
The answer here is very different.
For starters, the HSA contribution deadline is the same date as the tax deadline. This means you have roughly an additional 3.5 months after the end of the calendar year to retroactively make HSA contributions.
The IRS has stricter contribution rules for HSAs that wipes out the advantages of front-loading. I don’t think they are widely known, so I thought it would be good to share.
Your ability to contribute to an HSA is determined by whether or not you are enrolled on the first day of a given month in an HSA-qualified high deductible health plan (HDHP) and have no other conflicting health coverage. In other words, your annual HSA contribution is pro-rated by the number of months you are eligible to contribute (annual contribution maximum divided by 12). That is NOT the case with 401Ks.
You can still front-load an HSA, however, you’d have to pull back funds or face taxes and penalties if you were not eligible every month of the year. Any excess contributions and earnings must be reported as taxable income and excess contributions are subject to a 6% penalty for every year they remain in the HSA. You can withdraw excess contributions by the tax deadline to avoid the penalty, but that can be a pain. Check out IRS Form 8889 and its instructions for more on excess HSA contributions.
Additionally, employer HSA contributions are often made as a lump sum at the beginning of the year instead of matching by paycheck. With HSAs, there isn’t the same incentive to max your contribution before you leave an employer as there is with a 401K.
Furthermore, HSA maximums are much lower than 401K maximums, so the potential benefit of capturing more gains by contributing earlier in the year is much more limited. That potential benefit, in my view, does not outweigh the risk of taxes and penalties.
There is one clear exception to this rule. If you know that you will keep your HDHP/HSA throughout the year and you anticipate a big medical expense later in the year, it could be very advantageous to front-load your HSA to be able to use those funds. Withdrawals from HSAs for qualified medical expenses are completely tax-free – so you could save money versus paying out of pocket (with funds that have already been taxed).
I am a huge fan of HSAs (here are my picks for the best HSA account) and make the maximum contribution to them annually. In many ways, they are the ultimate tax-advantaged account. But with everything highlighted in this article, my recommendation is to not front-load your HSA. Outside of the exception I highlighted (if you can think of others, please share in comments), it makes more sense to take the maximum contribution and divide it equally by the number of paychecks you receive per year from your employer (or monthly if you are self-employed).
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Timely post I was thinking about this exact thing the other day and you have given me the answer! I started front loading my 401k last year and I will do that from now on. No reason to have the contributions neatly divided by each paycheck if you can afford to get it done much earlier.
HSA front loading sounds like a pain and you’re right the lower maximum doesn’t make it super appealing. There have been rumblings that this administration may increase the HSA max. But as with all administrations, I’ll believe it when I see it.
Hmmm, this is a good point. We have an FSA through Mr. Picky Pincher’s job. We plan to front-load it once we plan on having kiddos. Hopefully it will decrease our taxable income while paying out some medical bills. :)
FSAs are different. They are front loaded at the beginning of the year. So even if you leave a job mid year, You have had use of those funds the whole time.
1. My company doesn’t match more than 3% per paycheck. As a result, you have to contribute during all periods throughout the year to get the match. If you front-load in the first half of the year and don’t contribute in the second, you’ll get only 50% of the match.
2 You can’t time the market, therefore it’s safer to evenly contribute throughout the year. Let’s say Trump’s run end by the second half and market goes down 30% – you’ve already invested all 401k and have no funds to invest in less expensive market
imho
I have a singular situation. I turn 65 in April. According to your article I am limited to 3 months of contributions. My HSA catchup is $1000. Can I contribute the whole $1000 or do I have to pro-rate it the 3 months? Anyone?
My understanding is that catch-ups are pro-rated as well.
Well, you’ve mentioned a good and clever point in this article. By the way, I would rather like to contribute my funds/time evenly in various places. I’m somewhat like a critical person, so even if there’s 0.1% chance of something wrong, I step out. And again, if you invest everything in your first half, then you will be left with nothing to invest in the second half. So prefer investing evenly at various places rather than focusing on a single business/place. If one goes down, you’ll have the other one as a backup to have a stand in the market.
Something to consider is whether or not the bank that your HSA is housed with charges an administrative fee that is based on the balance of your account. Wouldn’t it make sense to front-load your HSA to at least the minimum to avoid the admin fees?
Does anyone know if the funds must be in the HSA prior to the qualified expense if one plans on saving the receipt to cash in much later? I just opened my first HSA with a $100 balance and expect to have a roughly $400 expense next month. I want to pay out of pocket and fund a separate HSA later when I can deposit enough to avoid maintenance fees. Is this possible?
I think one reason to front-load an HSA is if it is a new HSA and there’s a minimum amount required before the funds can be invested. My HSAs investment bank required a $1,000 minimum before I could start investing. This would have taken me about 3 months if I had spaced my contributions evenly through the year. So I only front-loaded enough to reach the minimum for investing. After the investments have started, then front-loading isn’t as important in later years.
A reason to NOT front-load is because my employer has healthcare incentives through the year (screenings, target goals, etc.) where they pay bonuses into my HSA. These bonus amounts and whether I qualify for them are unpredictable, and we need to be careful that the employer contributions don’t cause the total HSA amount for the year to exceed the IRS limit.
I agree with most of what you said, However, for people who are going to retire in the middle of the year, and will keep their high deductible health insurance throughout the year, there is a small advantages to front-load HSA contributions. Contributions made by pay-roll deductions are not subjected to Social Security and Medical tax, so you could save roughly $248 if you retire on June 30 and front load HSA in the first half of year. Another small point, only if agreeing with your argument in 401K, that it is better to fund your account in the first half of the year from investment perspective. Also, I personally think, if you can afford to, you should just keep your medical expense receipts, and never claim for reimbursement until you are at least 65 years old. You can treat HSA like a Roth, and never pay tax on earnings as long as it is used for medical expenses; it is unlikely that we have too much money saved for health care expenses for our old ages.
What if a person is sick in the early part of the year and needs to use the HSA funds to pay medical bills? You can’t plan to be sick or need surgery only in the last quarter of the year after you have made most of your HSA contributions. Let’s say you need surgery in mid February. Wouldn’t you want to front load your HSA in January in this case?
Another reason for front ending the contributions to HSA is if you are planning to claim social security benefits, it would automatically enroll you in Medicare Part A which has a 6 month look back. If you contributed to an HSA within 6 month of filing for social security benefits, you could be subject to a penalty since you are not allowed to contribute to an HSA while enrolled in Medicare.
My wife and I switched to her company’s plan when she started a new job in July last year and contributed the full family, yearly allotment of $6900 over the 12 months, rather than a prorated amount of that amount for the 6 months she was on the plan. I received no issues from tax preparation nor the federal government when we filed our taxes in April 2019.
A reason to front-load your HSA is when you set it up for the first time – it makes sense to always have enough funds to cover your deductibles.
I’m 55 and my wife and I just experienced some medical costs that my current HSA funds cannot cover. I understand that I can make a “once in a lifetime” transfer of funds from a traditional IRA into an HSA without incurring any tax implications or penalties as long as that contribution does not exceed the annual maximum ($8,100 for my family). There are also some rules stipulating that I can only transfer from my own IRA to my own HSA, not my wife’s HSA account. However, both the IRA and HSA are joint accounts. Can you confirm if I am still OK to transfer the full $8,100 (minus any payroll deduction YTD)? I will discontinue any further contributions from my paycheck once I know the final amount I can transfer so as not to exceed annual max. Thanks!
There is no such thing as a joint IRA account. Likewise, HSA account can only be an individual account. However, you can use your HSA account to pay for you or your wife’s eligible medical expenses and vice versa.
Hi Ching – Oops, you’re right – my mistake. What I’m trying to determine is if I can transfer from my individual IRA the full “Family” annual contribution to my HSA ($8,100).
I don’t see why you can’t. As you mentioned, make sure it is not over $8,100 including YTD contribution from you, and contribution by your employer for the whole year. You probably have already read article like the following –
https://www.investopedia.com/transfer-ira-money-to-an-hsa-4770819
If you need the money to cover the unexpected medical expense right away, it could be a tax smart way to do it. But, have you checked with the medical provider? Some of them may accept installment payments without charging interest, and you may not have to fork over funds from you IRA. Personally, I prefer to keep money invested in IRA, as they generally have better investment options.