Are you looking to invest more but need help utilizing your current income?
Do you want to contribute money to an investment account that can benefit you today, not just 10-30 years down the line?
If this sounds like you, a Health Savings Account (HSA) may be an excellent option.
An HSA offers several significant tax benefits that allow you to set aside money for medical expenses now and for years to come. Understanding your HSA contribution limits for 2024 can offer thousands in potential savings and non-taxable income. In funding and properly using an HSA, you can create several financial benefits while utilizing your current income.
This article will discuss the tax advantages of an HSA account, eligibility, contribution limits for 2023 and 2024, and what to use with your HSA funds to ensure proper use and avoid penalties.
What is an HSA Account?
First things first, let’s define what an HSA is. An HSA is a tax-advantaged account that allows you to save and use money specifically for medical or health plan purposes. It is similar to a savings account, but the funds in an HSA can only be used for eligible medical expenses.
Tax Advantages of an HSA
One of the most significant benefits of having an HSA is its tax advantages. There are three different ways that HSA offers its tax advantages.
1. First, your contributions are either tax-deductible or use pre-tax money, depending on how the funds are transferred to the account.
Manual contributions to an HSA are tax-deductible, meaning you can deduct the amount contributed from your taxable income when you file your taxes.
Automatic deposits to your HSA from your paycheck use pre-tax dollars, which reduces your taxable income to report at the end of the year.
The amount you add to your HSA account is categorized as either tax-deductible or pre-tax dollars. It cannot be both.
2. Any interest or investment earnings in the account are tax-free.
3. When you use the funds for eligible medical expenses, withdrawals are tax-free.
Does My HSA Rollover?
Any unused money in your HSA at the end of the year rolls over to the following year. This means you won’t lose your contributions if you don’t use them all within a specific time frame.
Because your HSA rolls over, contributing to your account can compound over time and be incredibly helpful if a significant medical expense arises.
Bonus Advantages
Here are a few more advantages to consider:
1. You can take your account with you if you leave your job without a deadline to use those funds.
2. Your employer may contribute a percentage to your HSA or offer an FSA. Check with your HR representative to learn more about what your employer offers.
3. If you have already paid a medical bill or have to pay for something out of pocket because you don’t have your account card, you can be reimbursed for your payment, pending it being a qualifying medical expense.
Who Is Eligible for an HSA?
To open an HSA, you must meet the eligibility requirements. Some of these requirements are adjusted yearly to reflect increasing healthcare costs and inflation, so staying current with minimum deductible requirements is essential to ensure you remain eligible.
To be eligible to open an HSA in 2024, you must meet the following criteria:
- Must have a high-deductible health plan (HDHP).
- Deductible must be at least $1,600 for individuals and $3,200 for families.
- Cannot be enrolled in Medicare.
- Cannot be claimed as a dependent on someone else’s tax return.
If your deductible is too low to meet these requirements, talk to your HR representative or your insurance provider to discuss how you can change your plan to meet the HSA deductible requirements.
Maximum Contribution Limits and Increases
After you open your HSA, it is vital to know the contribution limits to maximize your investment without causing a penalty. Although it is December already, you still have time to open an HSA account before the end of the year. Let’s look at the limits for 2023 and 2024 and note the differences.
HSA Contribution Limits for 2023:
- Individual: $3,850
- Family: $7,750
HSA Contribution Limits for 2024:
- Individual: $4,150 (a $300 increase from 2023)
- Family: $8,300 (a $550 increase from 2023)
As you can see, there is a slight increase in individual and family accounts. If you open an account in 2023, you can invest the entire annual amount allowed during this month at no penalty. Once January 2024 starts, you can typically contribute at the yearly limit rate for 2024.
What Happens If You Contribute Too Much Money in a Year
If you contribute more than the annual limit for your HSA, you will be subject to tax penalties. However, you can withdraw the excess contributions without penalty if you catch this mistake before filing your taxes.
If you exceed your contribution limit, you will be expected to pay the IRS up to 6% of the excess contributions.
Ways to Use Your HSA Contributions
As mentioned, the money in an HSA can only be used for eligible medical expenses. Knowing what does or doesn’t qualify as a covered cost can be confusing. Let’s look at different categories of qualifying expenses.
Examples of qualifying HSA medical expenses include:
- Out-of-pocket expenses, including copayments and deductibles.
- Prescription drugs and insulin.
- Medical equipment, like wheelchairs or walkers.
- Dental treatments, such as braces or dentures.
- Eye care, including exams, glasses, and contact lenses.
- Some alternative medical therapies with a prescription from a doctor (ac
You should be safe from issues on your purchases if you can prove your funds or your reimbursed payment was for a purchase that falls under these categories. Talk to your HR representative or HSA institution to ensure an expense will be covered.
Note: HSA spending can be subject to an IRS audit. Tracking your expenses and ensuring they are eligible before using your HSA funds is vital to seamlessly using your HSA. Keep receipts, bills, and payment records when you use your account to have the documentation you need to prove you used your HSA correctly if audited.
Conclusion
Health Savings Accounts (HSAs) are a great way to save money for medical expenses. With the triple-fold tax advantage, plus the other bonuses of utilizing this type of account, it is a great way to have money available for what you need while using your savings to invest in different ways.
With the contribution limits increasing in 2024, now is a great time to consider opening an HSA if you are eligible. Keep track of your expenses and contributions to avoid penalties if you are audited.
There are many ways to create more wiggle room in your budget to allocate to investments. Speaking with a financial advisor can make your options clearer and more attainable.
Iron Point Financial goes against the grain to provide you with the best financial management possible in an industry of one-size-fits-all financial planners. Our customized financial plans are catered to what you need and backed up by solid industry knowledge, analysis of current economic trends, and our commitment to ongoing profile management.
To talk to a financial advisor about how you can better utilize your income and create a comprehensive financial plan that works for you, call us or schedule an appointment to speak with a certified financial planner who cares about your unique financial goals.
