Milwaukee Journal Sentinel
Some couples can save $10,000 in HSAs next year
If you hate paying taxes (and most of us do), the IRS’ announcement that some couples may be able to sock away more than $10,000 next year in their health savings accounts should be music to your ears.
To keep up with the rampant inflation of the past few years, the IRS said recently it’s boosting by a record amount how much people can contribute to their HSAs next year.
For 2024, the maximum HSA contribution will be $8,300 for a family and $4,150 for an individual, up from $7,750 and $3,850, respectively, in 2023. Participants age 55 and older can contribute an extra $1,000, which means an older married couple could sock away $10,300 a year, up from $9,750 this year. Typically, HSA caps are boosted each year by only about 1.5%, or $100 to $200, if at all.
HSAs, often overshadowed by the better-known 401(k) and individual retirement accounts, are seen as one of the best retirement savings accounts despite their name and being underutilized by most Americans, according to the Employee Benefit Research Institute.
HSAs are intended to be tax-advantaged accounts to help people save for medical expenses, including deductibles, copayments, vision, dental, hearing, and even long-term care. To open one, you must have an HSA-qualified high-deductible health plan and not be enrolled in Medicare.
Contributions to an HSA are immediately tax-deductible, which means if a 55-year-old couple with a household income of $100,000 and a 22% tax rate contributes the maximum next year of $10,300, they’ll save $2,266 off the bat in taxes, said Jason Bornhorst, co-founder and chief executive of benefits platform First Dollar.
There’s more. Contributions can be invested and grow tax-free. Then, distributions at any age to pay for qualified medical expenses are tax-free.
That “triple tax advantage” to account holders enables people to
“It’s a triple tax-free account. It’s one of the best tax breaks in the tax code.” Zach Ungerott Senior wealth adviser at Hightower Wealth Advisors
stretch money earmarked for health care expenses further than they otherwise could and are better than those from 401(k)s or IRAs, both traditional and Roth. Contributions in an employer-sponsored 401(k) and traditional IRA are taxed coming out while Roth IRA money is taxed going in.
To maximize an HSA, people need to contribute as much as they can, invest their contributions and limit withdrawals, if possible, to allow compound growth.
Unfortunately, most people use their HSAs to pay for expenses, contribute little, and “relatively few” invest, the Employee Benefit Research Institute said. Only 12% of account holders invested their HSAs in assets other than cash in 2021, it estimated.
To demonstrate how important investing is, assume a 30-year-old contributes $8,300, the maximum family amount next year and invests it, with annual 5% growth and more yearly contributions. By 65 years old, the balance could be between $700,000 and $800,000 that can be used for qualified medical expenses, Ungerott said. That compares to about $350,000 if left in cash earning around 1% annually, he said.
Savvy users also use the HSA as an emergency fund or piggy bank. Since there’s no timeline of when you must reimburse yourself, you can accumulate records of medical expenses and use them to withdraw HSA funds taxfree to pay yourself back whenever you need emergency cash or just to spend when you turn 65 years old, said Ryan Losi, executive vice president of accounting firm PIASCIK.