Health savings accounts can be a great vehicle for managing your medical expenses, but it’s not always easy to figure out how much money you should aim to save. After all, who knows what might happen in the next year, much less in the next 20 years. Here are some guidelines to aid your calculations.
Understand How the Accounts Work
There’s often some confusion between health savings accounts (HSAs) and flexible spending accounts (FSAs), but it’s important to know that HSAs allow unspent funds to accumulate and grow tax-free, says Jeff Weeks, principal at ATX Portfolio Advisors. There’s no use-it-or-lose-it provision with these accounts, so you shouldn’t feel pressured to spend it down.
“Because of that, someone with a high-deductible health plan is best served by putting in as much as they can afford,” Weeks says. Those amounts are limited to $3,350 for an individual and $6,750 for a family in 2016. “Best of all, if an HSA is offered through your company’s benefit plan, the contributions are not only pre-tax but not subject to FICA or FUTA as well,” he says.
Estimate Your Expenses
While it can be difficult to determine what you might have to face in the coming year as far as your health is concerned, past experience can help you come up with a cost estimate. “When our clients have access to an HSA as part of their employee benefits, we have them take a look back at what their out-of-pocket expenses have been for the past three years,” says Rob Jupille, president of RTJ Financial Management. Disregarding any large, one-time expenditures, Jupille recommends averaging those three years and adding a 15 percent cushion. This amount can help you get a handle on health care costs throughout the year without tapping too much of your paycheck every month.
Consider Your Overall Financial Goals
HSAs are a great way to save for some costs after retirement, experts say, and they enjoy some major tax advantages. Contributions made through your employer can be tax-free and the interest is tax-free. When you use the distributions for qualified medical expenses, they are also tax-free. he says. Once you turn 65, HSA investments can also be used for Medicare premiums.
For this reason, you should maximize your contributions to your HSAs if you can afford it, says Ryan McGuinness, founder of wealth-management firm CTR Financial. “Given that the average couple can expect to have close to $400,000 in medical expenses during retirement that would qualify for HSA withdrawals, the money certainly won’t be wasted,” he says. “And if you’re a high earner who can’t deduct IRA contributions on your taxes, an HSA enables similar tax savings with no income limits. So max out the contributions if you can afford it.”