Health Savings Accounts (HSA)

The IRS has created many different tax-advantaged savings accounts over the last few decades. But the Health Savings Account (HSA) may just be the most tax-friendly savings vehicles ever written into the tax code. HSAs not only help you financially today, but can continue providing tax advantages for many years down the road.

Tax Benefits

The cost of health care is increasing faster than nearly any other expense for Americans. Being able to pay for medical services and products in a tax-preferred way can save you hundreds, if not thousands of dollars from now through retirement.

Health Savings Accounts provide the trifecta of tax advantages:

• Contributions are tax-deductible
• Earnings on account balances grow tax-free
• Distributions are tax-free for qualified purchases

Everyone is almost guaranteed to have health care expenses at some point in their lives. It only makes sense to find the most cost-effective ways to pay them.

Limits and Restrictions

Because of the tremendous tax advantages of HSAs, the IRS puts caps on the amount of money you may contribute every year. For 2024, individuals may contribute up to $4,150  while families may deposit up to $8,300 ($3,850 and $7,750 for 2023, respectively). That’s about 7% more than the 2023 limits. For individuals 55 or older, an additional $1,000 “catch-up” contribution is allowed every year.

But there is a catch. During the years in which you wish to contribute to an HSA, you must be enrolled in a high-deductible health plan. The IRS specifically defines how a plan qualifies as a high-deductible plan. For 2024, any plan with a deductible of at least $1,600 for individuals or $3,200 for a family. Further, a plan’s total out-of-pocket maximum cannot exceed $8,050 per individual or $16,100 for a family.

Spending HSA Savings

Health Savings Accounts are fantastic vehicles to save on medical expenses today or to save for future expenses you might have in retirement. Regardless of when you decide to spend your HSA dollars, it is important to keep all receipts for medical expenses on file. Receipts are required whenever you wish to make a distribution.

For those spending regularly, look for an HSA offering a checking account without maintenance fees and an accompanying debit card. Debit cards automatically track qualifying purchases when paying for medical services. They may also be used at pharmacies and retail stores but will require those receipts to back-up your purchases.

For those saving for future medical bills, considering an HSA with investment options. Since your account grows tax-deferred and distributions are tax-free, your investments are free from paying capital gains or income tax.

Choosing an HSA

Whether you have a high deductible through your employer or as a self-insured, you have the choice of which HSA provider to use. I can help you choose the best plan and HSA to maximize your savings on medical expenses and returns inside your HSA. If you have any questions, contact me today.