Over-Contribute to an HSA, IRA or 401k? Here's What to Do
If you use an HSA, IRA, or 401k, it's critical to never contribute too much. Here's how to fix an excess and avoid costly penalties.
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It’s smart to use legal ways to cut your taxes and keep more of your hard-earned money. Making contributions to tax-advantaged accounts—such as a workplace retirement plan, an Individual Retirement Arrangement (IRA), or a Health Savings Account (HSA)—are some of the best strategies to save more. They allow you to save for the future and reduce your tax burden at the same time—a winning combination!
But these special accounts can cost you if you don’t follow the often-confusing IRS rules that govern them. One key regulation you should never violate is the annual contribution limit. Putting too much money in any of these accounts is a big no-no, but it’s surprisingly easy to do.
In this post, I’ll review the allowable contribution limits for an HSA, IRA, and 401k, and explain what happens when you over-contribute. You’ll learn how to fix excess contributions and avoid costly penalties. I’ll also tell you whether the most recent tax proposal from House Republicans will affect your future retirement contributions.
What is an HSA?
An HSA is a special tax-exempt account you can set up for the sole purpose of paying medical expenses. But to qualify for one, you must be enrolled in a qualified high-deductible health plan (HDHP) purchased on the healthcare open market or through an employer.
Contributions to an HSA can come from you, someone else, or an employer.
No matter where you get your health insurance, you always own and manage an HSA as an individual. That means you don’t need permission from an employer or the IRS to set one up and it stays with you even if you change jobs or become unemployed.
Contributions to an HSA can come from you, someone else, or an employer. What you put in is deductible on your tax return, even if you don’t itemize deductions. When you take distributions to pay for qualified medical expenses, your original contributions plus any earnings are completely tax-free.
But if you use your HSA money to pay for anything other than qualified medical expenses, the amount withdrawn will be taxed as income, plus be subject to an additional 20% penalty. However, if you reach age 65 and still have money in an HSA, the penalty doesn’t apply. If you spend it on non-qualified expenses, like a trip to Hawaii, it would simply be subject to income tax.
So, an HSA eventually morphs into something that resembles a retirement account. That’s a great reason to max it out each year, even if you don’t expect many medical expenses.
More employers are offering HDHPs to help workers keep premiums as low as possible. They work in your favor when you're in relatively good health and aren't likely to spend the full deductible each year.
What Are the HSA Contribution Limits?
As I mentioned, there are strict limits on the total amount you can contribute to an HSA each year. Annual HSA limits apply to funds contributed by you, someone else, or your employer.
Annual HSA limits apply to funds contributed by you, someone else, or your employer.
For 2017, if you have a qualifying HDHP for yourself, the contribution limit is $3,400, or with a family plan, you can contribute up to $6,750. Next year the HSA limits go up slightly: For 2018, you can contribute up to $3,450, or up to $6,900 with a family plan.
For any year you make HSA contributions, there’s also a “catch up” policy that allows you to contribute an additional $1,000 when you have either an individual or a family policy, if you’re age 55 or older by year-end.
These total contribution limits apply when you’re covered by a HDHP plan for the full year. If you have coverage for just part of the year, your contribution limit is reduced proportionately.
You can make contributions at any time, even up to the tax filing deadline for the previous tax year. For instance, you can make 2017 HSA contributions until April 17, 2018. But you’re never required to make contributions to an HSA.