Jean Chatzky
For the uninitiated, a health savings account—commonly referred to as an HSA—is a type of account that allows you to set aside money before taxes are taken out to pay for qualified medical expenses. When you use untaxed money from an HSA to pay for health insurance deductibles, medical visit copays, and other expenses, you may be able to lower your out-of-pocket health care costs.
Who Qualifies for an HSA?
To qualify for an HSA, you must use a high-deductible health plan (HDHP) with a deductible of at least $1,600* for individuals, or a deductible of $3,200* for family coverage, according to the IRS.
- Note: As you may expect, there are a couple of caveats. Generally, HSA funds can’t be used to pay health insurance premiums, according to HealthCare.gov. You can’t make HSA contributions if you are a Medicare participant or a dependent on someone else’s tax returns, notes the IRS.*
Setting up an HSA
To get started, you can set up an HSA with a qualified trustee, which can be a financial institution, an insurance company, or anyone already approved by the IRS to be a trustee of health savings accounts (HSAs). According to the IRS, an HSA can be set up through a trustee that is different from your health plan provider. Need more details? Reach out to the HR department at your company to see if they already have information on HSA trustees where you live.
Is an HSA Right For You?
Everyone’s financial situation is different. That’s why George Kao, a certified financial planner with Reach One Teach One Financial, said he talks with clients to see if this savings account is even appropriate for them given their situation. “If your everyday expenses exceed your normal income, you should be focused on fixing that before even considering contributing to a HSA,” Kao said.
“If an HSA is right for your situation, it’s a great tool to save, in addition to your 401k and Roth contributions.”
Benefit of HSAs
“HSAs are going to be the best fit for those who are healthier and can afford higher deductibles if something happens,’ said Erik M. Baskin, CFP and founder of Baskin Financial Planning.
Another benefit, notes Baskin, is that you can reimburse yourself in the future for any past expenses as long as you keep the receipts. “This allows you to fund things like long-term care and end-of-life health expenses with relatively little money in today’s terms,’ he said. “The only cons of this plan would be the higher deductible or lack of coverage for a family member that may have very serious and chronic health issues that may be better served by a plan that has more coverage.”
HSA Contribution Limits
There’s some good news for those who plan to sock away money in HSAs next year. Annual contribution limits for HSA accounts in 2024 are increasing by more than 7 percent, notes the IRS*.
- The annual limit on HSA contributions for individuals is $4,150.
- The annual limit on HSA contributions for a family is $8,300.
- Those 55 and older can contribute an extra $1,000 to their HSAs annually.
HSA Tax Implications
In general, HSAs enjoy a triple-tax benefit, explains Kao: “That means they are contributed at a pre-tax basis, they grow on a tax-free basis, and when used for eligible medical-related expenses, they are withdrawn and spent on a tax-free basis.”
HSA Best Practices
Bryan Minogue, CFP, a financial advisor and founder of Kardinal Financial, offers these suggestions for how to make the most of health savings accounts each year.
-
During the open enrollment period analyze your anticipated healthcare costs using a high-deductible health plan (HDHP) and a non-HDHP. Consider premiums, deductibles, coinsurance amounts, and employer contributions to your HSA.
-
If you build your HSA to an amount equivalent to your deductible, you are well-positioned to cover major medical expenses.
-
Consider contributing the difference between the HDHP premiums and non-HDHP premiums to your HSA.
- HSA funds can be invested to grow your account. Each plan has different investment options that allow you to compound growth tax-free. Check with your plan for details, limitations, and investment guidelines.
With reporting by Casandra Andrews
*based on 2024 IRS Guidelines for High-Deductible Health Plans
Chris O'Shea
