What Are the Benefits of an HSA?
A Health Savings Account is a type of savings account that allows an individual to set aside money on a pre-tax basis to pay for qualified medical expenses like doctor’s visits, prescriptions, eyeglasses, etc. An HSA can be used only if you have a High Deductible Health Plan (HDHP).
High-deductible plans usually have lower monthly premiums than plans with lower deductibles but may require a higher emergency fund due to larger out-of-pocket potential. By using the untaxed funds in an HSA to pay for medical expenses before you reach your deductible and other out-of-pocket costs like copayments, you reduce your overall health care costs.
How much can I contribute to an HSA?
In Revenue Procedure 2022-23, the IRS confirmed HSA contribution limits effective for calendar year 2023, along with minimum deductible and maximum out-of-pocket expenses for the HDHPs with which HSAs are paired. Going into 2023, the maximum total contribution allowed from the employer and employee combined to an HSA is $3,850 for an employee with self-only health insurance coverage, and $7,500 for an employee with family coverage. These amounts are indexed for inflation. For an individual age 55 or over, an additional $1,000 contribution is allowed. Any employer contributions are tax free to the employee. The amount contributed to an HSA doesn’t affect the contribution limits for 401(k) plans or IRAs, which are $22,500 and $6,500 respectively for 2023.
What are the tax benefits of contributing to an HSA?
HSA plans offer triple tax-free benefits: money is deposited on a pre-tax basis, grows tax-free and can be withdrawn without paying taxes as long as the money is spent on health and medical expenses. In addition, an HSA does not require future Required Minimum Distributions (RMDs) at age 73 like IRAs and 401(k)s. Lastly, even if you withdraw money from an HSA after age 65 and use it for nonmedical purposes, you do not incur a penalty, although you do have to pay ordinary income taxes.
What's new for 2024?
Annual HSA contribution limits for 2024 are increasing in one of the biggest jumps in recent years, the IRS announced May 16: The annual limit on HSA contributions for self-only coverage will be $4,150, a 7.8 percent increase from the $3,850 limit in 2023. For family coverage, the HSA contribution limit jumps to $8,300, up 7.1 percent from $7,750 in 2023.
Participants 55 and older can contribute an extra $1,000 to their HSAs. This amount will remain unchanged.
Meanwhile, for 2024, a high-deductible health plan (HDHP) must have a deductible of at least $1,600 for self-only coverage, up from $1,500 in 2023, or $3,200 for family coverage, up from $3,000, the IRS noted. Annual out-of-pocket expense maximums (deductibles, co-payments and other amounts, but not premiums) cannot exceed $8,050 for self-only coverage in 2024, up from $7,500 in 2023, or $16,100 for family coverage, up from $15,000.
The IRS also announced it will raise the maximum amount that employers may contribute to an excepted-benefit health reimbursement arrangement (HRA) in 2024 to $2,100—up from the 2023 amount of $1,950.
The increases are detailed in IRS Revenue Procedure 2023-23 and take effect in January 2024.
2024 2023 Change| HSA contribution limit (employer + employee) | Self-only: $4,150 Family: $8,300 | Self-only: $3,850 Family: $7,750 | Self-only: +$300 Family: +$550 |
| HSA catch-up contributions (age 55 or older) | $1,000 | $1,000 | No change (set by statute) |
| HDHP minimum deductibles | Self-only: $1,600 Family: $3,200 | Self-only: $1,500 Family: $3,000 | Self-only: +$100 Family: +$200 |
| HDHP maximum out-of-pocket amounts (deductibles, co-payments and other amounts, but not premiums) | Self-only: $8,050 Family: $16,100 | Self-only: $7,500 Family: $15,000 | Self-only: +$550 Family: +$1,100 |
| Source: IRS, Revenue Procedure 2023-23. | |||
How does an HSA account fit into an overall strategy?
In order to gain the maximum benefit from your HSA at retirement, you must rethink how you view the account and how it is used. Instead of seeing an HSA as the go-to fund for immediate medical needs, you should view your HSA as an additional form of investment for retirement savings. Most studies today indicate that the average couple retiring at age 65 will need anywhere from $150,000-250,000 to cover medical expenses over and above Medicare. An HSA can be a valuable tool to pay for these expenses. If you “max fund” an HSA annually and do not use the funds for current medical expenses, the funds can accumulate significantly and help pay medical costs and long term care needs in retirement. {See our recent contribution to an article in Forbes here.}
If you can stay organized and stockpile receipts for past medical costs you paid out of pocket since establishing the HSA, you can file for reimbursement in retirement and still receive tax-free treatment. Doing this will allow you to supplement your retirement income tax-free in years in which tapping other accounts would push you into a higher tax bracket or expose you to higher Medicare premiums.
As you can see, contributing to and investing in your HSA provides an efficient way to save for those estimated retirement healthcare expenses; thus, minimizing the impact on your other retirement savings, so you can use those funds for things you’d rather spend money on, like traveling, gifting, grandchildren, etc.
With a Certified Health Savings Adviser (CHSA®) on our team, Gap Financial will help you select the HSA custodian that offers the most cost-effective plan. We will also help determine the appropriate investment allocation based on your tolerance for volatility, and we will manage the investments to meet your return objectives. Call us (512-745-4191) or email us (jarrod@gapfinancialservices.com) today for further information.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. We encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. For additional resources see: https://www.irs.gov/publications/p969