HSAs, or health savings accounts, aren't always considered retirement funds. It is intended to assist individuals with high-deductible health insurance plans in making tax-free medical bill payments. However, while you wait for the medical costs to arrive, you can invest your funds. Additionally, if you decide to cover those medical expenses out of pocket, your HSA's investments will be able to continue to grow until you retire.
The IRS recently increased the attractiveness of using an HSA to save for retirement. Here is what's new.
Increasing the limit
In 2024, the IRS established new health savings account contribution caps: $4,150 for individuals and $8,300 for those with family plans.
For individuals and families, those contributions represent an increase of $300 and $550 from 2023, respectively. That is an increase of 7% to 8% for each. Also unchanged from previous years is the $1,000 catch-up contribution cap for people 55 and older.
The increased substantial contribution limits give wise retirees even more opportunity to reduce their tax burden.
Who qualifies for an HSA?
You need a health insurance plan that qualifies in order to use an HSA.
The following traits define qualifying plans:
- The minimal deductible for individuals is $1,600 (up from $1,500 in 2023) and for families it is $3,200 (up from $3,000 in 2023) every year.
- A maximum out-of-pocket amount of $8,050 (up from $7,500 in 2023) for individuals and $16,100 (up from $15,000 in 2023) for families.
Not all high-deductible plans will be eligible because the out-of-pocket maximum can be higher.
If you are eligible, you can create an HSA for yourself. Your employer may set up an account in your name for payroll deductions if you participate in a health plan offered by your place of employment. If not, any service provider will let you set up a personal account.
The massive tax savings of an HSA
Four tax benefits provided by the HSA to investors can dramatically lower your tax burden both now and in the future.
- Contributions to an HSA are tax-free for individuals.
- On paycheck deductions made to an HSA, no Social Security or Medicare taxes are due.
- Capital gains and dividends in the account are tax-free.
- Taxes are not due on distributions used to pay for medical expenditures that qualify.
All of this results in a sizable decrease in your yearly tax burden.
If a family in the 22% tax bracket made the maximum HSA contribution, they would end the year with about $2,500 more in their bank account than if they had invested the same amount in a conventional brokerage account. Additionally, they presumably won't ever have to pay taxes again on that money, unlike other retirement plans.
Health savings accounts (HSAs) are a great way to save for retirement. They offer tax-free contributions, investment growth, and tax-free withdrawals for qualified medical expenses. In 2024, the IRS increased the contribution limits for HSAs, making them even more attractive for retirement savings.
If you are eligible for an HSA, I encourage you to open an account and start saving today. You will be glad you did when you retire and have a tax-free pool of money to pay for your medical expenses.
Here are some of the key points from the article:
- HSAs are tax-advantaged accounts that can be used to save for medical expenses.
- The IRS recently increased the contribution limits for HSAs in 2024.
- HSA contributions are tax-free, investment growth is tax-free, and withdrawals are tax-free for qualified medical expenses.
- HSAs can be a great way to save for retirement.
If you have any questions about HSAs, please consult with a financial advisor.