Tax Facts: Is maxing out your HSA contribution still part of your 2019 goals?

If you have a health savings account (HSA), how much are you contributing to it, and how much of that money are you withdrawing each year to cover your day-to-day medical expenses? If you're like most people, according to analyses by the Employee Benefit Research Institute (EBRI) and Lively, you're contributing far less than the maximum allowed amount, and then withdrawing nearly all of it during the course of the year.

As always, know that we're not tax or financial professionals, and the following should not be construed as investment advice. Always speak with a licensed professional before making any tax or financial decisions. Instead, the following is one author's view from her experience with HSAs.

Using your HSA funds to cover your day-to-day medical costs is a smart choice: You're using pre-tax funds, which means you don't have to earn as much money to pay those bills.

But if you're spending nearly all of the money in your HSA each year and you're not contributing as much as possible to the account, you're leaving money on the table and missing an opportunity to set yourself up for a less stressful future. In 2019, the contribution limits are $3,500 if your HSA-qualified health plan covers just yourself, and $7,000 if it covers at least one other family member.

According to the EBRI report, among HSAs that received contributions in 2017, average employer contributions amounted to $895, and individuals contributed an average of $1,949. And that's only looking at HSAs that received contributions; only half of HSA owners made contributions to their accounts, and more than a third of all HSAs didn't receive any contributions at all in 2017, including employer contributions.

Some of these unfunded accounts are likely owned by people who are no longer eligible to make contributions, but it's clear that some HSA owners are eligible to contribute to their accounts yet aren't doing so.

A little perspective...

Back in 2017, the maximum allowable contribution (including employer contributions) was $3,400 for people who had self-only coverage under an HSA-qualified health plan, and $6,750 for people whose HSA-qualified health plan covered at least one other family member. But only 13% of HSA account holders contributed the maximum allowable amount.

The EBRI analysis found that 95% of HSAs that received contributions in 2017 ended the year with an average balance of $2,764 remaining in the account to roll over into the coming year. But that includes the balances in accounts that have been growing for many years—it's not a balance that the average account holder is achieving after one year of contributions.

The Lively analysis found that the average HSA account holder ended up withdrawing 96% of their 2018 contributions to pay for medical care during the year.

That's not necessarily a bad thing. Out-of-pocket health care costs continue to increase, and the purpose of HSAs is to have access to pre-tax funds when we need them to pay medical expenses. In other words, the money is there to be used, and people are obviously using their HSAs to cover their medical bills. If most of us were also contributing the maximum allowable amounts to our HSAs, there wouldn't be much more to discuss.

But that's not what's happening...

Some HSA holders aren't contributing anything to their accounts, and among those who are stashing money in their HSAs, average contributions are much smaller than the maximum allowed.

So here's a reminder that an HSA is not the same thing as an FSA. With an FSA's use-it-or-lose-it rules, the best strategy is to set your contributions to be very close to what you expect to spend on medical needs during the year. But if you have access to an HSA, you don't need to limit your contributions to what you think you'll spend on health care that year.

Instead, you can focus on contributing as much as possible, up to the limits established by the IRS. Some people are already contributing the maximum allowable amount and still having to withdraw all of it. People with chronic conditions who have to meet their health plan's out-of-pocket cap every year may have little choice but to continually drain their HSA.

But let's say you have self-only coverage under an HSA-qualified health plan, and you're anticipating about $2,000 in medical costs this year, including some dental work, new eyeglasses, and a few doctor visits. Contributing $2,000 to your HSA and then using that money to pay those bills is certainly a smart move, since it will save you several hundred dollars in taxes.

But what if you set yourself a stretch goal of adding an additional $35 per week to your HSA, starting on March 1? By the end of December, your total contributions would hit $3,500. That includes the $2,000 that you were already planning to contribute and withdraw during the year, but instead of an HSA balance near zero, you'd be heading into 2020 with $1,500 sitting in your HSA.

Or maybe not…

Maybe you end up breaking your arm in November and having to withdraw everything that's in the account. That might not have been in your plans, but you'd still be better off than if you hadn't put that extra money in the account throughout 2019.

And if the year does go according to your plans, you'll have an extra cushion of money in your HSA next year, making any unforeseen medical situations less stressful than they would otherwise have been.

You never know when a major medical situation could arise, but you'll never regret having some tax-free money tucked away to pay medical bills. The option to let unused HSA funds roll over from one year to the next is one of the best perks of these accounts, but you only reap that benefit if you plan to contribute more than you think you'll need to spend in a given year.

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Tax Facts is a weekly column offering straight up, no-nonsense HSA tax and finance tips, written in everyday language. Look for it every Tuesday, exclusively on the HSAstore.com Learning Center. And for the latest info about your health and financial wellness, be sure to follow us on Facebook and Twitter.