The annual contribution limit for health savings accounts, or HSAs, will soon get a huge increase due to inflation, the IRS announcement this week.
For 2024, the annual limit for HSA plans for individuals increases from $3,850 to $4,150 in 2023, and the limit for family plans increases from $7,750 to $8,300. The catch-up contribution for savers aged 55 and over remains at $1,000 each, raising the total deposit limit for a few older individual savers to $10,300
This is a “significant increase” over historical HSA inflation adjustments, according to Ashton Lawrence, a certified financial planner and director of Mariner Wealth Advisors in Greenville, South Carolina.
Before 2022, the average annual increase in the HSA contribution limit was about 1.6% per year, Lawrence said, and the jump from 2023 to 2024 for individual and family plans will be about 8% and 7 %, respectively. “It’s hugely beneficial to customers,” he added.
Clients often ‘forget’ the tax benefits of HSA
You must have a high-deductible health insurance plan to qualify for HSA premiums. Qualifying plans require a deductible of at least $1,600 for single coverage or $3,200 for a family plan for 2024, according to the IRS.
But those who qualify may not fully understand how accounts work. “Clients often overlook the investment and tax planning benefits of an HSA,” said Judy Brown, CFP and senior financial advisor at SC&H Group in the Washington and Baltimore area. She is also a chartered accountant.
Health savings accounts offer three tax advantages:
- There is an initial “above the line” deduction for contributions that allows you to claim the tax relief even if you do not itemize the deductions. And you can contribute until the tax deadline, which means you can make deposits in 2024 until the filing deadline in 2025.
- Contrary to individual pre-tax retirement accounts or 401(k) plans, which may also offer initial tax relief, you can withdraw money at any time tax-free for eligible medical expenses.
- You can also grow the account tax-free by investing, which can become a “retirement nest egg for medical expenses,” Brown said. But most Americans don’t use HSAs for this purpose. According to a April 2023 Report from the Employee Benefits Research Institute.
“The HSA is a great option to do something the IRS rarely allows, which is to have your cake and eat it too,” along with the initial tax relief and future tax-free withdrawal, said Jim DeGaetano, CFP and founder of Diamond. Wealth Advisors in Carlisle, Pennsylvania. He is also a CPA.