Health Savings Accounts (HSAs) are a popular financial tool that provides Americans with a tax-advantaged way to save for medical expenses. They allow individuals or families to set aside pre-tax dollars that grow tax free and can be withdrawn tax free when used for qualified medical expenses.
You can use the funds in an HSA for a wide range of medical costs, including purchasing medications, covering copayments for doctors’ visits, and even paying for dental care. Unlike flexible spending accounts, HSAs also do not require you to spend down your balance each year.
Recently, the IRS announced significant increases in HSA contribution limits, potentially creating additional advantages for account holders. Here’s what you need to know.
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2024 HSA Contribution Limits
- Individuals: The annual contribution limit for individuals under self-only plans will rise to $4,150, a 7.8% increase over the previous year’s limit of $3,850.
- Families: For those under family plans, the annual limit increases to $8,300, a 7.1% increase over the $7,750 limit in 2023.
The IRS also allows additional “catch-up contributions” for account holders who are aged 55 or older by the end of the calendar year. This remains unchanged at $1,000 for 2024. With the catch-up, individuals can contribute up to $5,150, and a couple who are both age 55 or older can contribute up to $10,300 in 2024.
The Significance of the 2024 HSA Changes
The 2024 increase in HSA limits is not an arbitrary decision by the IRS. Rather, the change is linked to the Chained Consumer Price Index. In prior years, the average annual increase in the HSA contribution limit was approximately 1.6%. This year’s 7% to nearly 8% increase reflects increases in inflation over the past year. The adjustment aims to help offset the higher cost of living and the continued rise in healthcare costs.
HSA Advantages: Beyond Immediate Healthcare Costs
While using HSA funds to cover immediate healthcare costs is common, many people miss the opportunity to use their accounts for longer-term planning. This opportunity comes from the triple tax advantage offered by HSA accounts. By investing in an HSA, you have the potential to take advantage of the following benefits.
1. Upfront Tax Deduction
HSAs offer an “above-the-line” deduction for contributions, allowing you to receive a deduction if you don’t itemize your taxes. You also have the flexibility of making these contributions up until the tax filing deadline, allowing 2024 contributions to be made as late as April 15, 2025.
2. Tax-Free Withdrawals for Medical Expenses
Unlike many retirement accounts, HSAs allow tax free withdrawals for qualified medical expenses at any age. This provides flexibility and can offer additional financial security in the face of unexpected medical bills.
3. Potential Investment Growth
In addition to earning interest, you can also allocate the funds in your HSA to investments such as stocks and bonds. The investment potential paired with tax-free growth could significantly increase your account value over time.
Key HSA Requirements
To contribute to an HSA, you must be enrolled in a high deductible health insurance plan. To qualify for HSA contributions in 2024, the IRS mandates a deductible of at least $1,600 for self-only coverage and $3,200 for family plans. This is an increase of $100 and $200, respectively, over the 2023 deductibles.
High deductible health insurance plans also have annual out-of-pocket maximums, which include copayments, deductibles, and other amounts, but do not include premiums. For the 2024 plan year, this amount has increased to $8,050 (from $7,500 in 2023) for individual plans and $16,100 (from $15,000) for family plans.
Using HSAs for Strategic Long-Term Planning
The tax advantages offered by HSAs have made them popular for more than simply covering immediate healthcare costs. Instead, many financial experts consider them an essential component of a well-rounded retirement strategy. Here’s a look at some strategic planning options.
Covering Medical Expenses in Retirement
While Medicare covers many health-related costs, covered individuals still have to pay some expenses, such as deductibles, copayments, and coinsurance. A well-funded HSA can help offset these expenses, providing you with additional financial security in your retirement years.
For example, you can use your HSA to pay certain Medicare expenses, including premiums for Part B and Part D prescription-drug coverage, but not supplemental (Medigap) policy premiums.
Leveraging Tax-Free Growth
By maximizing your HSA contributions each year and investing them wisely, you may benefit from compound growth. Over time, this could result in a significant account balance in later years.
Financial Flexibility in Retirement
Once you turn 65, you can take nonmedical withdrawals from your HSA without a penalty. While you still owe taxes on funds withdrawn for nonmedical reasons, this additional flexibility can be an important benefit during your retirement years.
Hedge Against Future Medical Inflation
By funding your HSA now and investing it for growth, you can essentially create a hedge against future increases in healthcare costs. Given the unpredictability of healthcare inflation, this can be a strategic financial move.
Tips for Maximizing Your HSA Benefits
With proper planning and a clear understanding of the features and benefits HSAs offer, you can optimize your account for long term value. The following tips may help you maximize your HSA benefits.
Fund Your HSA Early and Regularly
The sooner you start contributing to your HSA, the longer your investments have to grow. If possible, aim to hit the maximum contribution limit each year.
Defer HSA Spending
While it’s tempting to use HSA funds for current medical bills, consider paying those expenses out-of-pocket if you can afford it. Letting your HSA funds grow can lead to substantial savings for your future.
Stay Up to Date on Rules and Changes
Healthcare policies and tax laws change. Make it a habit to stay updated on HSA-related changes each year so you can make proactive decisions.
Consult with a Financial Professional
A financial advisor can show you how to integrate your HSA into your broader financial plan. This can help you ensure that you’re making the most of potential tax and savings benefits.
Maximizing the Potential of Your HSA
HSAs potentially offer a cushion to help protect you against rising healthcare costs and the unpredictability of future health needs. With strategic planning, you can use the new 2024 contribution limits to maximize the potential long term benefits of your HSA plan.