Many wish they had learned about taxes in school. While we are certainly fans of education, especially around accounting, tax regulations change so frequently! Much of what you have learned has probably changed multiple times since you were a student.
For example, the Health Savings Plan has some new big changes you may want to consider.
What’s an HSA, and Why Should You Care?
Health Savings Accounts, or HSAs, are a financial strategy that offers a unique blend of tax benefits and healthcare convenience. These accounts are designed to help you save money for specific medical expenses while simultaneously reducing your taxable income. Here’s the scoop:
Perhaps the most enticing feature of HSAs is that your contributions are tax-deductible. When you contribute to your HSA, you’re effectively lowering your taxable income, leading to potential savings come tax season.
Limitations by the IRS:
While HSAs offer fantastic benefits, they come with a caveat: the IRS places annual contribution limits. These limits vary based on factors like whether you have single or family coverage and whether you’re over the age of 55.
2024 HSA Contribution Limits: What’s New?
The IRS has recently released the HSA maximum contribution amounts for 2024, and the news is promising. Here’s a breakdown of the key numbers:
- For individuals under a High Deductible Health Plan (HDHP): $4,150.
- Family coverage: $8,300.
- If you’re 55 or older, you can contribute an additional $1,000 as a catch-up contribution.
These 2024 limits reflect around a 7% increase compared to the previous year, providing you with more financial flexibility when it comes to covering qualified medical expenses.
Qualified Medical Expenses: Where Can You Spend Your HSA Funds?
Understanding what qualifies as a medical expense is essential when managing your HSA. Generally, qualified medical expenses include costs related to medical diagnosis, treatment, or preventive care. This can encompass a wide range of expenditures:
- Doctor visits and hospital stays.
- Prescription medications.
- Dental and vision care.
- Mental health services.
- Preventive care.
- Certain medical equipment and supplies.
The beauty of using your HSA for these expenses is that withdrawals are tax-free, meaning the money you spend doesn’t count as taxable income.
Eligibility and High Deductible Health Plans (HDHPs)
To contribute to an HSA, you must be enrolled in a High Deductible Health Plan (HDHP). For the 2024 tax year, an HDHP is defined as a health plan with an annual deductible of at least $1,600 for single coverage or no lower than $3,200 for family coverage. Additionally, annual out-of-pocket expenses cannot exceed $8,050 for self-only coverage or $16,100 for family coverage.
2023 HSA Limits: Don’t Forget the Present
While the 2024 contribution limits are exciting, it’s crucial not to lose sight of the present. For the 2023 tax year, your contribution limits are as follows:
- Up to $3,850 for self-only coverage.
- If you have family coverage, you can contribute up to $7,750.
- The additional $1,000 catch-up contribution applies if you’re 55 or older.
Comparatively, these amounts represent an increase of $200 for self-only coverage and $250 for family coverage from the 2022 limits. This upward trend highlights the significance of HSAs in today’s financial landscape.
Triple Tax Benefits: The Power of an HSA
HSAs are often lauded for their triple tax benefits. Here’s what that means:
- Tax-Deductible Contributions: Your contributions are tax-deductible, reducing your taxable income.
- Tax-Free Growth: Once your HSA reaches a certain threshold, you can invest the money, and the interest or gains earned are tax-free.
- Tax-Free Withdrawals: When you use the funds for qualified medical expenses, your withdrawals remain tax-free.
Portability and Convenience
An HSA is a powerful tool that offers both financial and medical flexibility. Importantly, it’s portable. This means that your account and the funds within it are yours, even if you change jobs or insurance providers.
So – Should you strategize your plan?
With the IRS raising contribution limits for 2024, it’s an opportune time to explore the possibilities of an HSA. If an HSA is already part of your financial strategy you may want to consider the possibility of contributing more.
As we started at the beginning of this article, tax laws frequently change and there is no promise this increase is here to stay. If your finances allow, it very well may be worth the investment.
HSAs offer not only peace of mind when it comes to healthcare but also a robust approach to building a more secure financial future.