Should I contribute the maximum annually to my HSA or only enough to cover the out-of-pocket maximum?

Question

I am young, healthy, and rarely use my HSA for any kind of relevant expenses. I might use it once a year for a prescription or something, but I'm certainly not maximizing the use of my funds (I don't buy every day items, like band-aids, with my HSA funds).

I still want to make good use of my HSA as a hedge against future healthcare costs / risks. However, I have bills to pay and prefer saving cash to make large purchases, so cash flow is still a concern.

Should I...

• Maximize HSA contributions as a major precaution against future healthcare costs? I can afford it, but it would limit my cash flow and savings ability.

• Contribute only enough to cover the annual out-of-pocket maximum, as a reasonable precaution? I assume I'll be healthy enough to work and recontribute the next year.

Maybe I'm missing an angle... what do you think?

Answer 1

I would save the maximum amount that you can afford up to the contribution limit. The purpose of the HSA is to self insure for future medical expenses. This is what makes low premium, high deductable plans work as you should be putting the money that would have gone to a standard's premium into the HSA.

Of course you need to ensure that you retain a healthy cash flow after HSA and you are properly funding retirement and other savings. Also give consideration to your own and family health history for what an acceptable level of HSA savings would be.

At minimum I would probably want to build the HSA balance up to at least cover the full deductable range.

Answer 2

At the very least, I would recommend contributing the minimum amount that your company matches, if they do indeed have a program like this.

Otherwise, I would recommend contributing the minimum such that you always have enough in your HSA to cover your maximum out-of-pocket for that year.

Bear in mind that your HSA can carry though your working career and be used into retirement for health-related expenses and is a tax-advantaged account. Personally, I'm in a position where I can contribute the yearly maximum. I keep enough in the account to cover my yearly out-of-pocket and invest the rest in a small portfolio of Vanguard funds. I am also young and relatively healthy, so I expect this account to grow quite a bit by the time I retire.

This has the advantage of lowering my gross adjusted income (reducing my taxes) and also has the added benefit of being sort of a backdoor retirement account in addition to my 401(k) and IRA.