How Much Money Should I Contribute to My Health Savings Account?

Like so much in life, the answer to this question depends on one’s situation.  But let’s start with how a Health Savings Account works and how it differs from a Flexible Spending Account.  A Health Savings Account is a “triple tax advantaged” account intended to be a savings mechanism for people with a high deductible health plan.  And unlike a Flex Spending Account, where unused funds are returned to the plan administrator at the end of the plan year, a Health Savings Account truly belongs to the individual with balances that roll from year to year, and even from employer to employer and employer to retirement. 


Regarding the triple tax savings, as a contributor you not only receive federal and state income tax preference (you are not taxed on funds you deposit into your Health Savings Account), you also receive payroll tax abatement, generally an additional 7.65% tax on your income charged by your employer to fund Federal SocialSecurity and Medicare programs. 

The above advantages (two of three) are probably best illustrated with an example.  Suppose you make $65K a year and are in the 25% marginal tax bracket.  If you elect to contribute $1,000 into your health savings account, your adjusted gross income goes down by $1,000, to $64K.  What the IRS sees is a lower amount of income to tax, and in this case 25% of $1,000 is $250, and your portion of FICA is 7.65%, or $76.50, meaning $326.50 in taxes is not being paid to Uncle Sam.  Further, unless you are in AL, NJ, or CA, these contributions are not taxable at the state level. 

Finally, contributions to a Health Savings Accounts can be withdrawn from the account to pay for medical related expenses tax free.  And once you are 65, amounts can be withdrawn for ANY purpose without tax fines; participants only need to pay ordinary income tax, as they would on a 401(k).

So with all of that discussion, the question still stands, how much should you contribute?  The answer is simple: as much as you can, with a goal of allocating any excess contributions not used for medical expenses as an extra retirement fund that you can use in retirement not only for medical expenses, but for any purpose whatsoever.