Compound It! How to balance your HSA max with your out-of-pocket max

Readers of this site are well-versed in how your HSA can serve as a fail-safe financial investment. But how do you balance your health care spending needs with an HSA? And what do you do if you're about to hit the out-of-pocket max on your coverage?

In our first edition of Compound It!, our weekly saving and investment advice column, we'll give you some tips on how to approach your out-of-pocket max in alignment with the HSA max, while getting all the financial breaks you can.

How to make this balance work

To qualify for an HSA, the out-of-pocket max for your health insurance must be $6,650 or less for individuals, and $13,300 or less for families. It's not uncommon to find a high-deductible plan with a larger out-of-pocket max, but that will make you ineligible for an HSA. Remember this limit when you sign up for health insurance!

If your out-of-pocket is $5,000 and you want to save enough with your HSA to cover that amount in case of emergencies, you're going to run into a problem. The annual HSA maximum contribution in 2018 is $3,450 for individuals and $6,900 for families. Those 55 and older may save an extra $1,000 in their HSA, as long as they turn 55 by December 31 of the year they contribute.

If you save too much in an HSA, you'll pay a 6% tax on that amount. You also won't be able to deduct the overage on your taxes.

Instead of trying to reach the out-of-pocket max in one year (if it's higher than the HSA max), spread it out between multiple years. Your out-of-pocket max will likely be similar each year, unless you choose a drastically different health plan, or change your health insurance provider.

Let's say your out-of-pocket max is $5,000 this year and your HSA is currently empty. You're reasonably healthy, but want to be prepared in case of medical emergencies. You create a monthly automatic transfer of $287.50 from your bank account to your HSA which will equal $3,450 in 12 months. In 17 months, you'll have enough to cover your out-of-pocket max.

At that point, you can stop saving, reduce your monthly contributions, or keep contributing the maximum amount. If you continue to save up to the HSA limit, you'll have $6,900 after the second year. You might even be able to save more, since HSA contribution limits tend to increase slightly each year as the cost of living goes up.

If you stop saving once you reach the $5,000 limit, you can tailor your HSA strategy to just fulfill the out-of-pocket max. That means if you go to the doctor for an MRI that costs $500 out of pocket, you'll add an extra $500 to your HSA that month.

Continuing to max out your HSA every year isn't a bad strategy if you already have a fully-funded IRA or 401k. You can invest HSA money in mutual funds and ETFs once you have more than $2,000, which is why financial planners call HSAs a back-door retirement account.

Those 65 and older can use HSA funds on any purchases without paying the 20% penalty, though they'll still be responsible for income tax. They can even leave behind their HSA in their estate.


Compound It! is your weekly update of achievable, effective, no-nonsense HSA saving and investment advice, delivered by people who make it work in their own lives. For the latest info about your health and financial wellness, be sure to check out the HSA Learning Center, and follow us on Facebook and Twitter.

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