Federal law adjusts the maximum contribution for HSAs each year to take
inflation
into account. Anyone can contribute to your HSA. You, your family members, and your employer can contribute either up to the amount of your deductible or up to the federally mandated maximum, whichever is less.
You’re responsible, though, to be sure that the amounts that go into your account don’t exceed the limit. If too much is deposited, you could face a penalty.
For example, in 2008 the federally established maximum contribution is $2,900 if you’re single and $5,800 for families. If your HDHP had a deductible of $2,000, you could contribute up to $2,000 to your HSA that year. But if your HDHP had a deductible of $3,500, you could contribute at most $2,900, the amount of the federal maximum.
As an added benefit, if you don’t spend your whole contribution during the year, you can leave the remainder in the account to grow tax-free. And the money left in your account won’t affect what you’re allowed to contribute the following year.
If you open an HSA after the first of the year, your contributions must be pro-rated. For example, if you open an HSA on July 1, you can put half of the annual cap that applies to you into the account. Catch-up contributions must also be pro-rated.
Taking advantage of time
You might be tempted to put as little money as possible in your HSA early on if you’re young and healthy and haven’t spent much on medical care in the past. It might be better, however, to put in as much as you can, since the amount left over can become a cushion to help you later on. For example, if you need to pay for expensive medical care early in the year, without money left in your HSA from the previous year you may end up paying with after-tax dollars.
Furthermore, by contributing as much as you can when you’re young and healthier, even if you anticipate you won’t spend it all on medical expenses right away, you can take advantage of the power of
compounding
to build a reserve to cover medical expenses later in life.
Playing catch-up
If you’re 55 or older, the government allows you to make additional contributions — known as catch-up contributions — to your HSA. Through 2008, the maximum catch-up contribution is $900, after which the catch-up contribution will be $1,000. After age 65, you can’t make any more contributions.
