Health Savings Accounts (HSAs) are valuable financial tools offering a variety of benefits, including substantial tax savings, investment opportunities, and flexible spending options for healthcare. Maximizing your HSA contributions in 2024 can be a smart way to improve both your current and future financial health. Here are three compelling reasons why:
1. Tax-Free Healthcare Expenses: One of the main benefits of contributing to an HSA is tax savings. Contributions made to your HSA are tax-deductible, effectively lowering your taxable income. Contributing the 2024 maximum amount of $4,150 for individual coverage or $8,300 for family coverage reduces your taxable income by that amount. Furthermore, any withdrawals you make for qualified medical expenses are tax-exempt.
HSAs cover many IRS-approved healthcare expenses, making them an essential tool for managing medical costs. Eligible expenses include prescription medications, dental care, orthodontics, vision care (glasses and contact lenses), mental health services, surgeries, and hospital stays. This broad coverage offers flexibility and significant financial savings for essential healthcare needs. However, certain expenses, like nutritional supplements and weight loss programs without a physician’s prescription, are typically excluded.
Using your HSA to cover eligible healthcare expenses provides a direct tax advantage. For example, if you’re in the 35% tax bracket, every dollar you contribute to your HSA lowers your tax liability by $0.35. For a major expense like fertility treatments costing $15,000, your HSA could save you approximately $5,250 in taxes.
2. Investment Opportunities: HSAs differ from Flexible Spending Accounts (FSAs) in that unused funds roll over each year, allowing your savings to grow over time. The real advantage comes when you invest those funds. Many HSA providers offer investment options such as mutual funds and Exchange-Traded Funds (ETFs) once your balance reaches a certain threshold. These investments grow tax-free, like a retirement account, without incurring capital gains taxes. This makes them a highly efficient way to save for future healthcare expenses. Even if you don’t need the funds immediately, your investments can compound and grow tax-free over time, increasing your long-term savings.
3. Extra Retirement Income: One key advantage of maxing out your HSA is its flexibility as a retirement savings tool. After age 65, you can withdraw funds for any purpose without the 20% penalty, though non-medical withdrawals are taxed like a traditional IRA or 401(k). When used for healthcare, HSA withdrawals are tax-free, making it an effective way to manage increasing medical expenses in retirement without tapping into your other savings.
Contribution Limits
The HSA contribution limits for 2024 are $4,150 for individuals and $8,300 for families. For the calendar year 2025, the annual contribution limits increase to $4,300 for individuals with self-only coverage and $8,550 for those with family coverage.
Individuals aged 55 and older who are not enrolled in Medicare by December 31 of the current tax year can make an additional $1,000 catch-up contribution to their annual HSA limit. If you and your spouse have separate HSAs, each can contribute an extra $1,000. However, with a family HSA, the catch-up contribution is limited to just $1,000, not $2,000. To fully maximize your tax-free savings potential, it’s beneficial for both spouses to maintain individual HSAs.
High-deductible Health Plan Requirement
To contribute to an HSA, you must be covered by a high-deductible health plan (HDHP). For 2024, the IRS defines an HDHP as having a minimum deductible of $1,600 for individuals or $3,200 for families, with out-of-pocket limits of $8,050 for single coverage and $16,100 for family coverage. For 2025, the minimum deductible increases to $1,650 for individuals and $3,300 for families, with out-of-pocket limits of $8,300 and $16,600, respectively.
If you enroll in an HDHP by December 1, 2024, you can contribute the full HSA limit for the year. However, you must stay enrolled for the entire next year to avoid penalties.
Employer Contributions
Many employers contribute to employees’ HSAs either as a fixed amount or through matching, which is tax-free for the employee. However, employer contributions reduce how much you can personally contribute. For example, if your employer adds $1,000 to your HSA, your limit for 2024 would drop to $3,150.
If your employer’s HSA doesn’t meet your needs or they don’t offer one, you can open an HSA with another provider. Although contributions made outside an employer plan are subject to Social Security and Medicare taxes, you can still benefit from deducting those contributions.
Health Savings Accounts offer more than just a way to pay for medical expenses—they’re also a powerful tool for tax savings and long-term investments, especially with retirement in mind. Whether you anticipate major healthcare expenses soon or are planning for future costs, maximizing your HSA contributions in 2024 can deliver both immediate tax benefits and future financial growth. If you’re covered by a high-deductible health plan, it’s worth taking full advantage of your HSA this year.
Contact your Stephano Slack tax manager/partner at 610-687-1600 or [email protected] for more information.
Author Jennifer Crawford, CPA, is a manager dedicated to helping high-net-worth individuals and small to middle-market businesses navigate complex tax matters, focusing on family-owned businesses. Known for her strategic thinking and expert insights, Jennifer works closely with her clients to develop customized tax planning strategies that maximize savings and reduce tax liabilities. Her deep understanding of tax regulations and proactive approach helps clients remain compliant while fully leveraging opportunities to save. To discover how Jennifer can help you implement tax-saving strategies, contact her at 610-687-1600 or [email protected].
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