Takeaways
- HSAs are perfect for planning future healthcare expenses by stashing cash away.
- HSA contribution limits are capped by the IRS, and savings are accessible year after year.
- HSAs have a 2024 contribution limit of $4,150 for individuals and $8,300 for families.
- HSAs have a catch-up contribution of an additional $1,000 if you are 55 or older.
- HSAs allow you to invest and grow your savings, increasing your ability to save quickly.
Navigating the world of healthcare and finances can seem daunting, but understanding tools like a Health Savings Account (HSA) can significantly simplify your healthcare spending. An HSA is not just a way to set aside money for medical expenses; it’s a powerful financial planning tool that can enhance your finances and provide tax advantages.
What Is an HSA?
A Health Savings Account (HSA) is a specialized savings account designed to offer those with High Deductible Health Plans (HDHPs) a way to save money tax-free for medical expenses. When you fund an HSA with pre-tax dollars, you can use the accumulated funds to pay for various out-of-pocket healthcare costs without facing federal taxes at the time of withdrawal. This can include expenses such as deductibles, copayments, coinsurance, and other fees not typically covered by medical insurance. It's important to remember that to have an HSA, you must also have a qualifying HDHP.
The Internal Revenue Service (IRS) provides specific criteria for an HDHP. For 2024, these plans are defined by a minimum deductible of $1,600 for individual coverage or $3,200 for family coverage.[1] These thresholds are often adjusted annually to reflect economic changes, inflation, and healthcare costs.
To utilize an HSA, you must be enrolled in a plan that meets these criteria. HDHPs are typically less expensive in monthly premiums than lower-deductible plans. However, they require you to pay more out-of-pocket before the insurance starts to cover medical expenses. This is where an HSA starts to shine because it allows you to prepare financially for the higher deductible amounts while benefiting from the lower premiums.
An HDHP paired with an HSA effectively enables you to manage unpredictable medical expenses with pre-planned, tax-advantaged savings. By correctly understanding and leveraging an HSA, you can reduce your overall healthcare spending and increase your financial flexibility, both now and in the future. This strategic approach to financing your healthcare expenses simplifies managing expenses and enhances your broader financial wellness.
2024 and 2025 HSA Contribution Limits
| Plan Coverage | 2024 | 2025 |
|---|---|---|
| Self | $4,150 | $4,300 |
| Family | $8,300 | $8,550 |
| Catch-up contribution (ages 55+) |
$1,000 | $1,000 |
How to Qualify for an HSA
To be eligible to open an HSA, you must be enrolled in an HDHP. The IRS specifies further eligibility criteria: you must not be covered by another non-HDHP health plan (including Medicare). Additionally, you cannot be claimed as dependent on someone else’s tax return.
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How an HSA Works
Once you qualify for an HSA, you can set up an account through your employer if they offer one or sign up with a financial institution. You can contribute pre-tax income to your HSA up to a limit set by the IRS—for 2024, the limits are $4,150 for individuals and $8,300 for families.[2] People aged 55 and older can contribute an extra $1,000 as a catch-up contribution.
Contributions to an HSA can be made by you, your employer, or both, but the total annual contributions must be within the specified limits. Funds in your HSA roll over year to year if you don't spend them. If you are healthy, this can allow you to amass a substantial amount toward future healthcare costs. This rollover feature distinguishes HSAs from Flexible Spending Accounts (FSAs), where funds are forfeited if not used by the end of the year.
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What Expenses Are Eligible?
You can use your HSA funds to pay for a wide range of healthcare expenses not covered by your health insurance. This includes:
- Insurance deductibles
- Doctors’ visits
- Dental services
- Medical equipment
- Prescription medications
- Over-the-counter medications (in some cases)
Like with most healthcare reports and accounts, keeping receipts and records of your expenditures is crucial if you need to prove that withdrawals were used for eligible expenses.
Advantages of an HSA
One of the most significant advantages of an HSA is the tax benefit. Contributions are made with pre-tax dollars, which lowers your taxable income. Any interest or other earnings from the money in your HSA grow tax-free, and if used for qualified medical expenses, withdrawals are also tax-free.
Another significant benefit is the potential financial security it provides. Because funds in an HSA roll over from year to year, they can accumulate, providing a financial cushion for future healthcare needs, even into retirement. In fact, after age 65, you can withdraw funds for non-medical expenses without the penalty that applies to younger people, although these withdrawals will be subject to income tax.
Read More: 2024-2025 Income Tax Rates and Brackets
Another vital advantage of a health savings account is the ability to invest your savings. Depending on where your HSA account is located, you can invest your HSA funds in stocks, mutual funds, ETFs, and more. By investing your HSA funds, you can grow your account balance faster than savings alone. Read more about how to invest your HSA savings.
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Disadvantages of an HSA
Despite their benefits, HSAs aren’t perfect for everyone or every family. To qualify, you must be covered by a high-deductible health plan, so you will have higher out-of-pocket expenses before your insurance kicks in. This could be financially challenging for those who require frequent medical services or have high ongoing medical costs.
Another challenge is that managing an HSA requires keeping thorough records, receipts, and other documents to ensure that withdrawals are used exclusively for qualified medical expenses. Otherwise, you could incur penalties or taxes.
Smart Summary
An HSA can be a valuable tool for managing healthcare expenses and maximizing financial health. They provide significant tax benefits and an opportunity to save for future health expenses tax-efficiently. However, they are best suited for those who can handle the higher deductible requirements of the associated HDHP and manage their healthcare expenses effectively. Before deciding on an HSA, it’s a smart money move to review your current healthcare needs and financial situation. Consulting with a financial advisor or a tax professional can provide personalized guidance and help you make the most out of your Health Savings Account.
(1) Internal Revenue Service. Proc. 2023-23. Last Accessed January 17, 2025.
(2) Internal Revenue Service. Publication 969 (2023), Health Savings Accounts and Other Tax-Favored Health Plans. Last Accessed January 17, 2025.
