Whether you have medical expenses coming up or you're just looking for a tax-advantaged place to put your retirement savings, a health savings account (HSA) can be a great tool. But like any tool, you need to understand how it works if you want to put it to best use. Here are three things you need to know before contributing to an HSA in 2024.
1. Not everyone is eligible to contribute to an HSA
HSAs are only available to those with a qualifying health insurance plan. In 2024, you need an individual health insurance plan with a deductible of $1,600 or more or a family plan with a deductible of $3,200 or more. That's a slight increase from 2023, when you only needed deductibles of $1,500 or $3,000, respectively.
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For some people, their health insurance provider changes annually depending on what their employer chooses. So you need to verify eligibility every year before putting money in an HSA. If you aren't eligible and you make contributions, you'll run into problems with the IRS.
You should already know what kind of health insurance you'll have next year. Reach out to your plan administrator if you're unsure what the deductible is. If it's not high enough, stick to other accounts, like IRAs for retirement savings or high-yield savings accounts for upcoming medical bills.
2. Contribution limits are rising
HSA contribution limits are increasing in 2024, so those eligible to contribute to one of these accounts can save even more next year. Individuals may save up to $4,150 and families may save up to $8,300. Those 55 and older can tack an extra $1,000 onto these limits.
Contributions to your HSA reduce your taxable income for the year. And if you spend it on medical expenses, you won't pay any taxes on it at all.
You can also make non-medical withdrawals, though you'll pay a 20% penalty for this if you're under 65, plus taxes. Past this age, there's no penalty but you will still pay taxes on your withdrawals. It essentially works like a traditional IRA with the bonus of tax-free medical withdrawals.
3. Investing your HSA funds is key to getting the most out of them
Some HSAs work similarly to a savings account where your money earns a small amount of interest until you're ready to take it out. There's nothing wrong with this. But if you hope to use your HSA funds for retirement expenses, you'd do better by investing them.
You'll have to find an HSA provider that allows this. Check with your current plan administrator to see if it's an option. Otherwise, you may have to switch to a new account. Pay attention not only to the investment options the account provides, but also to what you'll pay in fees as this could affect how quickly your balance grows over time.
It's a good idea to review the above things annually. Eligibility requirements and contribution limits frequently increase and you will probably want to adjust your investment strategy over time. Schedule a check-in with yourself around this time in 2024 so you can plan your HSA contributions for the following year.
