Rising inflation costs allow employees to contribute more money to their Health Savings Accounts (HSA) in 2024. The IRS announced one of the most significant jumps in contribution allotment in recent years on May 16, 2023. This is an excellent opportunity to review HSAs, why they benefit financial and retirement planning, and how you can maximize their effectiveness. 

Let’s dive in!

What Are HSAs and How Do They Work?

A Health Savings Account (HSA) is a tax-advantaged savings account designed to help individuals and families save money for qualified medical expenses. They are only available to individuals enrolled in a High Deductible Health Plan (HDHP), a type of insurance that typically has lower premiums but higher deductibles when compared to transitional insurance plans. 

Eligibility Requirements

To be eligible to open and contribute funds to an HSA, you must meet the following criteria:

  • You are covered by an HDHP (must have a deductible of at least $1,600 for single coverage or $3,200 for a family). 
  • You have no other health coverage (exceptions for dental, vision, or specific preventative care)
  • You are not enrolled in Medicare
  • You aren’t claimed as a dependent on someone else’s tax return

Contribution Limits

HSA contribution limits can and usually do, change yearly. It was recently announced that annual limits are making one of the biggest jumps in recent years in 2024. The limits for 2024 are as follows: 

  • Single coverage: $4,150 (an increase of 7.8% from the 2023 limit: $3,850)
  • Family coverage: $8,300 (up 7.1% from the 2023 limit of $7,750)

In addition to the yearly limits, individuals enrolled in an HSA above 55 can contribute an extra $1,000 over that limit as a “catch-up” contribution. This amount didn’t change from 2023 to 2024.

The IRS also announced raising the maximum amount employers may contribute to their employees’ HSAs. This jumped from $1,950 in 2023 to $2,100 in 2014. 

The Role HSAs Play In Financial and Retirement Planning 

But what does all of this have to do with your financial plan? HSAs offer several benefits when it comes to financial planning. The first is via your tax bill. 

HSAs are triple-tax-advantaged. Say that three times fast! This means that your contributions are tax-deductible (lowering your taxable income), the money within the account grows tax-free, and withdrawals used for qualified medical expenses are tax-free at any time – meaning you can use your funds whenever you need them!

In addition, unlike Flexible Spending Accounts (FSAs), HSA funds can roll over from year to year, and the account is portable, which means it will always belong to you, whether you change employers or retire. 

Because of all of this, HSAs can be a powerful tool for financial planning because they allow you to strategically:

  • Save for future medical expenses (tax-free)
  • Build a nest egg to help cover healthcare costs during retirement
  • Reduce your taxable income during the years that you make contributions
  • Have flexibility in how and when you can use the funds for qualified expenses
    • Qualified expenses include doctor’s visits, prescription medications, dental and vision care, and medical supplies.

How to Maximize Your HSAs Effectiveness

Many people utilize HSAs to manage healthcare expenses and as a valuable component of their financial plan. But, it’s essential to understand the rules and restrictions associated with HSAs and use them wisely to maximize their benefits while simultaneously complying with IRS regulations. 

Here are some critical steps to making the most of your HSA for long-term effectiveness:

  1. Contribute the maximum amount: Always take advantage of the total contribution limits, especially if you have an employer that matches your contributions. Remember, this money follows you and can be used whenever needed, so it’s a great place to save funds. 
  2. Invest your HSA funds: Most HSA plans offer you the option to invest your contributions in mutual funds or other investment options. Doing this can earn higher returns over time and boost your retirement savings. But, of course, any form of investing carries risk, so choose investment options that align with your risk tolerance and time horizon. When in doubt, always check with your financial advisor to develop an investment plan that works for you. 
  3. Pay current medical expenses out of pocket: Avoid using your HSA funds to cover current medical expenses. Instead, pay for these expenses out of pocket. This will allow your funds to grow tax-free, and you can ultimately reimburse yourself for those expenses. 
  4. Use HSA funds for Retirement Healthcare Costs: HSA funds can become essential during retirement. Whether retiring early or bridging the gap in your Medicare coverage, HSA funds can help keep strain off your other retirement savings. 
  5. Coordinate with other retirement accounts: HSAs work well with other retirement accounts like 401ks, IRAs, Roth IRAs, etc. Consider how your HSA fits into your overall retirement plan. 

The last way to maximize the effectiveness of your HSA is to seek professional guidance from a financial advisor. They can help you create a personalized retirement strategy that incorporates your HSA effectively. 

By utilizing a combination of disciplined contributions, savvy investment choices, and strategic use of the account for qualified medical expenses, you can build a significant source of tax-advantaged income for your healthcare needs in retirement. 

Please contact us today for more information on utilizing your HSA and incorporating it into your financial plan. 

After a successful career in high-tech, Sheila McGinn, CFP® followed her passion and became a fee-only Financial Planner, where she helps clients navigate complex financial decisions and reach their financial goals.

Disclaimer: This content is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. For advice specific to your situation, consult a financial planner, accountant, and/or legal counsel. Reproduction of this material is prohibited without written permission from Brightview Financial Solutions, LLC, and all rights are reserved.