Missed Part 1 on HSAs? Check it out here on Substack.

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You’ve opened your HSA, funded it, and are ready to manage those medical bills. Now comes the question – how to optimize your HSA for maximum benefit. Let’s dive into contribution limits, saving strategies, investment options, and explore similar accounts like FSAs and HRAs.

Contribution Limits: How Much Can You Put Away?

The IRS sets annual contribution limits for HSAs. In 2024, individuals can contribute up to $4,150, and families can contribute up to $8,300. You can contribute the full amount at once or spread it throughout the year. You have until April 15 of the following year to make these contributions. For those 55 and over, “catch-up” contributions of an additional $1,000 are allowed.

Saving Strategies: Building Your Healthcare Nest Egg

An HSA, while useful, tends not to be the immediate focus on where to put your savings first. At the very least, having enough to cover your annual deductible or most of it will help cover an unexpected, expensive medical year. However, here are a few things you should consider before contributing to an HSA:

• An adequate emergency or rainy-day fund (we wrote about that here)
• Max out your employer match from an employer retirement plan such as a 401k or 403b.
• Pay off any major debts (credit cards & other high-interest debts)

After those three things, max out your HSA contribution.

How much of the HSA should I Invest?

The beauty of HSAs is the ability to invest your contributions for long-term growth, similar to an IRA. Many HSAs offer investment options like mutual funds or target-date funds. Depending on your personal financial factors & planning, you can invest your money as you like, as much or as little of it. Consider keeping some of your HSA funds liquid, such as in a money market fund, to cover your annual deductible – think of it as your short-term emergency health money in case you need it. This way if you need to cover a large, unexpected medical expense, you have the cash on-hand regardless of how good/bad the economy is.

Similar Accounts: Understanding Your Options

There are additional types of medical accounts as well you may come across. Here are a few common ones:

• Flexible Spending Account (FSA): FSAs are similar to HSAs that you can use contributed pre-tax money towards qualified medical expenses. However the FSA differs with the contribution limit, inability to invest the funds, and the “use-it-or-lose-it” aspect where unused contributed funds are forfeited if not used by the end of the year. These are normally used by those who are not eligible for an HSA. Also, an FSA is only available through an employer’s benefit package – you cannot open this account yourself. These accounts require a lot of management to avoid forfeiting your hard-earned money in the new year. Generally, you cannot contribute to both an FSA & HSA at the same time(with exceptions below). Here is some information on carryover limits.
• Health Reimbursement Account (HRA): HRAs are employer-funded accounts used for qualified medical expenses, with contribution limits set by your employer. Unlike HSAs, you cannot contribute to HRAs, as the employer is the sole contributor. The employer has control over the amount & frequency that funds are added to the account, as well as what happens to any unused funds. You can have an HSA & HRA simultaneously with specific conditions being met. More info here.
• Limited Purpose Flexible Spending Account (LPFSA): You can have this subtype of FSA at the same time as an HSA, an exception noted above. An LPFSA only covers qualified dental & vision expenses & has the same carryover rules as a standard FSA.
• Dependent Care Flexible Spending Account (DCFSA): Also available alongside an HSA, contributions to this pre-tax dollars account can be used to cover child care or adult daycare expenses. This account helps parents & guardians with expected costs related to caring for young children & elderly parents. More info here.

– M