Health savings accounts, more commonly known by its acronym, HSA, are one of the most tax-advantaged accounts the IRS recognizes. Read below for more information on what an HSA is, who qualifies, and the advantages gained by setting one up.
What is a Health Savings Account (HSA)?
An HSA is a tax-advantaged savings account that is created for people who get their insurance coverage through high-deductible health plans (HDHPs). Contributions to the account made by the employee or employer are tax-exempt income and can be used to pay for qualified medical expenses that are not covered by the HDHPs.
What is considered a High Deductible Health Plan?
For 2024, the IRS defines an HDHP as follows:
- Individuals – minimum annual deductible of $1,600, but not greater than an annual deductible and other out-of-pocket expenses of $8,050
- Family Coverage - minimum annual deductible of $3,200, but not greater than an annual deductible and other out-of-pocket expenses of $16,100
Who Qualifies?
- Covered by a high deductible health insurance plan (HDHP)
- Not covered by any other plan that is not an HDHP
- Not enrolled in Medicare
- Not claimed as a dependent on someone else’s return
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🎇 Benefits of an HSA
- Get a tax deduction for the funds you contribute into an HSA – amounts contributed are deducted from your taxable income.
- Withdrawals are tax-free if used for qualified medical expenses (Using funds for non-qualified medical expenses results in taxes and an additional 20% penalty)
- After 59 1/2 you can withdraw money for non-medical reasons but you will pay income tax on the distributions, however, avoiding the 20% penalty.
- Unlike a flexible savings account (FSA), it is not a use-it-or-lose-it account; rather, funds contributed roll over from year to year.
- You can invest funds within an HSA in things like mutual funds, stocks, etc. It does not have to just grow at a small savings interest rate. Essentially using it as a retirement account.
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Maximum Contribution – limits on contributions apply to the total dollars contributed by both employer and employee
- 2024 - $4,150 for an individual and $8,300 for a family
- 2025 - $4,300 for an individual and $8,550 for a family
- Individuals 55+ by the end of the tax year can make a catch-up contribution of an additional $1,000
- Contributions can be made until the tax filing due date (April 15 of the year following the tax year)
🔗 Read more about the advantages of an HSA here