A health savings account (HSA) provides one of the most-effective ways to save for out-of-pocket medical costs, both now and in the future.
HSA contributions are pretax (or tax-deductible if your HSA is not provided through your employer), funds grow tax-sheltered, and withdrawals are tax-free as long as the money is used for eligible health care expenses. And because of increases in health care costs, the amount you’ll be able to contribute to an HSA will rise significantly in 2024.
If you have an individual health insurance plan, you’ll be allowed to contribute up to $4,150, an increase from $3,850 in 2023. For family coverage, you’ll be allowed to contribute up to $8,300, up from $7,750 in 2023. If you’ll be 55 or older at the end of the year, you can put in an extra $1,000 in catch-up contributions.
To qualify for an HSA, your health plan must have a deductible of at least $1,600, up from $1,500 in 2023, or $3,200 for a family plan, up from $3,000 in 2023. The plan must limit out-of-pocket expenses to $8,050 for self-only coverage, or $16,100 for family coverage.
If you had an HSA in 2023, you have until April 15, 2024, to make any final 2023 contributions to the plan.
Despite the advantages that HSAs offer, about half of Americans are unfamiliar with how they work, according to Fidelity Investments. More than 45 percent of adults surveyed by Fidelity mistakenly believe HSAs are subject to a “use it or lose it” rule that requires them to spend funds in the account by year-end. While flexible spending accounts for health care are subject to that restriction, funds in an HSA can be rolled over to future years. And if you leave your job, you can take your account with you.
Although an HSA provides an important backstop in the event of a medical emergency, it can also provide a way to save for health care expenses in retirement. You can use HSA funds to pay for medical costs that Medicare doesn’t cover, as well as monthly premiums for Medicare parts B and D and Medicare Advantage plans. You can use HSA money to pay a portion of long-term-care insurance premiums, too; the amount you can withdraw tax-free depends on your age.
You could have even more funds for retirement expenses if you invest a portion of your HSA contributions in the stock market, providing the opportunity for growth. But while many of the largest HSAs offer an investment option, research by the Employee Benefit Research Institute found that only 12 percent of account holders invest in assets other than cash. Fewer than half of Americans surveyed by Fidelity were aware that their HSA contributions could be invested.
