Because of inflation, you’ll be able to put considerably more money into your health savings account next year.
Contribution caps for HSAs are rising substantially, giving you the chance to stash more tax-free funds for medical bills if you’re able to.
Currently, in 2023, individuals may contribute up to $3,850 to their tax-advantaged HSA, while those with family coverage can pitch in up to $7,750.
But in 2024, individual contributors will be allowed to add up to $4,150 to their HSA, and those with family plans can contribute up to $8,300.
That represents increases of roughly 7%–8%, making this one of the more significant upticks in recent years.
(People 55 and older can tack on an extra $1,000 as a catch-up contribution if they wish.)
What Is a Health Savings Account (HSA)?
A health savings account is a tax-favored account that you and your employer can fund to cover eligible medical expenses using pretax dollars. Because contributions reduce your taxable income, they offer a tax-advantaged way to prepare for health costs.
You can spend HSA funds as medical expenses arise, or you can let the balance grow by investing those dollars for future needs.
Employers or employees can establish HSAs. The purpose of an HSA is to help people manage the costs associated with high-deductible health plans. (A deductible is the amount you pay out of pocket before your insurance begins covering certain services.)
In fact, to be eligible for an HSA next year, your insurance deductible must be at least $1,600 for an individual or $3,200 for a family plan.
HSAs can be used for a wide array of out-of-pocket medical expenses. They’ve played a key role in making health care more attainable for low- and middle-income households that have historically struggled with premiums and deductibles that can reach into the thousands.
HSA vs. FSA: The Key Difference
It’s important to understand that a health savings account (HSA) is not the same as a flexible spending account (FSA), mainly because of the “use it or lose it” rule that applies to most FSAs.
With an FSA, any money you don’t spend by the plan year’s end is typically forfeited. With an HSA, unused funds roll over year after year.
Most People Don’t Max Out HSAs Despite the Tax Perks
The reality is that many employees don’t contribute the maximum to their HSAs. The typical HSA participant keeps a relatively small balance and doesn’t come close to the contribution limit, according to research from Employee Benefit Research Institute.
Still, HSAs offer clear advantages. Primarily, an HSA lets you save for qualified medical costs without paying taxes on those dollars.
If you receive this benefit through your employer, they can arrange to have part of your paycheck directed to your HSA before taxes are applied. Or if you put post-tax income into the HSA, you can claim those contributions as deductions when you file your taxes.
You also avoid taxes when you spend HSA funds, provided the expenses are qualified medical costs.
Another plus of an HSA is that interest or investment gains inside the account aren’t subject to taxes as your balance grows.
To learn more about the basics of health savings accounts and whether one might be right for you, check out what is an hsa.
Alex Mercer is a senior writer at Savinly.
