If you're looking to supercharge your retirement savings, there's one account that stands out above the rest if you ask me: the health savings account.
The health savings account, or HSA, isn't always thought of as a retirement account. It's designed to help people on high-deductible health insurance plans pay their medical bills tax free. But you can invest your savings while you're waiting for those medical bills to come in. And if you choose to pay those medical bills with funds outside your HSA, it will allow the investments in your HSA to grow all the way until retirement.
The IRS just made using an HSA for retirement saving even more appealing. Here's what's new.
Increasing the limit
The IRS set new contribution limits for health savings accounts in 2024: $4,150 for individuals and $8,300 for people on family plans.
Those contributions are a $300 and $550 increase from 2023 for individuals and families, respectively. That's a 7% to 8% increase for each. There's also a $1,000 catch-up contribution limit for those age 55 and older, which remains the same as in years past.
The new sizable contribution limits provide an even greater opportunity for savvy retirement savers to save on taxes.
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Who qualifies for an HSA?
In order to use an HSA, you must have a qualifying health insurance plan.
Qualifying plans have the following characteristics:
- A minimum annual deductible is $1,600 for individuals (up from $1,500 in 2023) and $3,200 for families (up from $3,000 in 2023).
- An out-of-pocket maximum of $8,050 for individuals (up from $7,500 in 2023) and $16,100 for families (up from $15,000 in 2023).
Note, not every high-deductible plan will qualify, as the out-of-pocket maximum may exceed the threshold.
If you do qualify, you may open an HSA yourself. If you're in a workplace-sponsored health plan, your employer may open an account in your name for payroll deductions. If not, you can open an individual account at any service provider.
The massive tax savings of an HSA
The HSA offers four tax advantages for investors that can significantly reduce your tax bill today and in retirement.
- You don't pay individual income taxes on contributions to an HSA.
- You don't pay Social Security or Medicare taxes on payroll deductions contributed to an HSA.
- You don't pay taxes on capital gains or dividends in the account.
- You don't pay any taxes on distributions for qualifying medical expenses.
That all adds up to a significant reduction in your tax bill at the end of the year.
Someone in the 22% income tax bracket maxing out their family's HSA contribution would have nearly $2,500 extra in their bank account at the end of the year compared to someone investing that money in a regular brokerage account. Plus, unlike other retirement accounts, they'll probably never have to pay taxes on that money again.
Get your money out easily
When you're ready to take a distribution from your HSA in retirement, there are a couple of things to consider.
You can take a distribution to reimburse yourself for any qualifying medical expense incurred since you opened the HSA. Even if you're no longer covered by a high-deductible health plan, you can use your HSA funds to reimburse healthcare expenses. What's more, you can take those distributions at any point after the expense, regardless of age. So, if you retire early, you may tap your HSA to help you get to the age where you can withdraw from other retirement accounts.
Any distribution covering a qualifying expense comes out completely tax-free. If, however, you don't have enough medical expenses to pay for, you can start taking penalty-free distributions for any reason starting at age 65. Those distributions will incur income tax, making it similar to a traditional IRA. Ideally, though, you won't have to tap your HSA for anything except to reimburse qualifying expenses in retirement.
With the IRS boosting the contribution limit, it might not be long until you have a substantial amount in your HSA to withdraw.
