Maximize your Health Savings Account to save (and earn!) more in the long run

An HSA is a tax advantaged savings account, used in conjunction with a high deductible health plan (HDHP), that can be used to pay for the out-of-pocket expenses you may incur. Health insurance premiums are often costly, and therefore no one enjoys seeing that monthly deduction come out of their pay. One common misconception people have is associating the dollars they put into their HSA as a health insurance premium expense.  As a result, many work to minimize the contributions they make to their HSA, as they want to keep their costs as low as possible. This is incorrect, as minimizing HSA contributions may actually cost you more!

It’s time to reeducate ourselves and shift the paradigm on HSAs. An HSA is an asset like your checkbook, your savings account, or your 401k. Our goal should be to make it as large as we can. And fortunately, the IRS is willing to help us.

So, how exactly can contributing to your HSA save you money in taxes? An individual earning $40,000 (or $80,000 for a family) is in a 22 percent marginal tax federal tax bracket, a 6.33 percent NYS marginal tax bracket, and pays 7.65 percent for FICA/FUTA. That’s a 35.98 percent tax bracket. For every dollar this individual puts into an HSA, they will save 36 cents in taxes.

Let’s look at this using larger figures: the maximum HSA contribution for 2020 is $3,550. If you put in the maximum amount of $3,550, it actually only costs $2,273 due to the tax savings. Not a bad deal! And, if that money is not all spent on medical expenses within the year, you can invest the money and it grows tax-free.

Say Bob has an HDHP that is paid in full by his employer. He averages $1,000 per year in out-of-pocket medical expenses. To pay for those expenses, he earns $1,563, pays his taxes, and has $1,000 left to pay his bills. If he put the $1,563 into an HSA, he could pay his $1,000 out-of-pocket expenses and still have $563 in savings. Over 10 years, that annual savings of $563 grows to $7,080 at five percent; and to $26,870 in 25 years! If Bob maxes out the savings by contributing the maximum of $3,550, he would have $30,616 in 10 years, or $121,703 in 25 years. Talk about money left on the table!

In order to maximize your HSA and ultimately save or earn more money, determine what you can afford. Maybe you can’t max out your contribution just yet, and that’s okay. Budget accordingly to contribute where you can. Once you determine how much you can afford, you should make your contributions as follows:

1. Make a contribution to your HSA up to the average out-of-pocket medical expense. You’re going to spend these dollars anyway, so you might as well save 35 percent and pay them pretax.

2.If your employer has a 401k with a match feature, take advantage of it!

3.Once you max out the employer match, put the extra funds into your HSA. You have more flexibility to use those dollars than you do in the 401k plan.

4.Finally, if you have money left to invest, max out your 401k.

Whatever you do now makes a big difference down the road. Take advantage of those pre-tax plans. For questions on maximizing your HSA, feel free to reach out to me at or (585) 248-5870 ext. 124.