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One nice feature of your Health Savings Account is that you have some leeway as to when you are allowed to make contributions for a given year. We know that there is a contribution limit established each year ($3,300 / $6,550), but you don’t necessarily have to contribute any of it during that fiscal year.
That is because you can make prior year contributions to your Health Savings Account up until the tax filing deadline, which is usually April 15th of each year. A prior year contribution is simply a contribution that applies to the prior year’s contribution limit.
So for example, I could open an HSA in 2013 and not contribute a dime the entire year. On April 15th, 2014 I could contribute the maximum amount of $3,300 towards my HSA and designate that it apply to my 2013 contribution limit.
Said another way, even though we are in year 2014, I am contributing to my HSA in 2013, up to the contribution limit. The key is that, whenever you make a HSA contribution between January 1st and April 15th of a given year, there is an option on your HSA providers form to apply it to the previous year. Make sure to select the previous year if that is when you wish to apply the contribution.
Benefits of Prior Year Contributions
- Catch up – The ability to make prior year contributions gives you the opportunity to catch up and fill your HSA if you are under your contribution for a given year. That way, you don’t miss any possible contributions and you can grow your HSA as much as possible.
- Flexibility – While in theory funding and investing your HSA as early in the year is preferable (more time to grow), making a prior year contribution provides additional flexibility in that you have 3.5 extra months to find and contribute that cash.
- Tax Planning – Any income you contribute to an HSA is tax deductible, meaning you don’t need to pay taxes on it. Thus, if you estimate your tax bill and find you have a tax burden, you can shelter some of that money from taxes by contributing to your HSA.
Likely, this rule was implemented because it makes no difference to the IRS what year your contribution goes towards as long as it is made prior to filing taxes. You can use this “loophole” to your benefit in the aforementioned ways.