How much you can contribute to your health savings account — considered a go-to retirement tool by many financial planners — is getting the biggest increase ever next year.
The new 2024 annual limit announced by the IRS on health savings account, or HSA, contributions for individuals will be $4,150, a $300 or 7.8% uptick from the $3,850 limit in 2023. For family coverage, the HSA contribution limit rises to $8,300, up $550 or 7.1% from $7,750 this year.
That’s the largest climb in the contribution level since the accounts were established in 2004. The big bump is on top of this year's sizable 5.5% increase over 2022 contribution limits, and is sharply up from the tiny 1.4% increase between 2021 and 2022. The extra catch-up contribution for account holders 55 and older remains fixed at $1,000.
“HSA contribution limit increases for 2024 are the highest we’ve seen and are a natural consequence of inflation running hotter than in the past,” Jake Spiegel, research associate, health and wealth benefits, at the Employee Benefit Research Institute (EBRI), a nonprofit, nonpartisan organization, told Yahoo Finance. “The increase will certainly help account holders stretch their health care savings a little further.”
The larger contribution maximum can also help boost retirement savings with the vehicle’s triple tax advantage.
What is an HSA?
In order to put money into an HSA, you must be enrolled in a high-deductible health plan. With a high-deductible plan, you pay a lower premium per month than other types of plans, but a higher annual deductible — the amount you pay for covered medical costs before insurance kicks in.
You can also open an account as a self-employed freelancer or business owner if you have a qualified high-deductible health plan (HDHP).
Your HSA contribution with your employer can be made through an automatic payroll deduction where the funds are directed from your paycheck, tax-free, into the account. You can also add funds directly to your HSA at any time. While these contributions aren't tax-free, they are deductible on your tax return.
Some employers match contributions to HSAs similar to employer-provided retirement savings accounts. Your contributions roll over year after year and are yours to take along when you retire or change employers.
There’s a hefty 20% penalty on any withdrawal amount that is not used toward a qualified medical expense like your deductible, and you’ll pay income tax on the disqualified sum.
For anyone 65 or older, the penalty is gone, meaning you can withdraw funds for any purpose and only pay income tax on it, which leads to what makes these accounts so appealing.
‘More tax-efficient than retirement plans’
An HSA account can be a shrewd way to stoke up saving for retirement. It benefits from a triple tax advantage. It’s the only account that lets you put money in on a tax-free basis, lets it build up tax-free, and lets it come out tax-free for qualified healthcare expenses.
“The triple tax advantages that HSAs offer are more tax-efficient than retirement plans,” HSA specialist Roy Ramthun, who led the US Treasury Department’s implementation of HSAs after they were enacted into law in 2003, told Yahoo Finance. “They should not be considered a replacement for traditional retirement plans, but can offer a nice complement to them.”
The reality, though, is that most account holders use their HSAs to pay for current expenses and do not take advantage of the tax benefits HSAs offer. Only about 2.6 million health savings accounts have at least a portion of their HSA dollars invested, according to HSA advisory firm Devenir.
A recent EBRI report that reviewed a database of over 13 million HSAs backs that scenario up.
“On average, accountholders appear to be using HSAs as specialized checking accounts rather than investment accounts, though this behavior appears to change the longer an HSA owner holds an account,” according to the researchers.
Maybe the higher contribution levels will have more people considering the possibilities. Ramthun said the “most significant” outcome from the new limits is for married couples. If both spouses are both HSA-eligible and 55 or older, they could contribute a combined total in excess of $10,000 per year to their HSAs — “$8,300 + $1,000 + $1,000 = $10,300,” he said.
“I have heard that many financial advisors don’t think HSAs are worth the trouble because people can’t put enough money in them each year, but for these older couples $10,000 a year for 10 years before they turn 65 adds up to over $100,000 to help with health care expenses in retirement,” Ramthun said.
To put it mildly, that will come in handy.
“Medicare is not free, has lots of out-of-pocket expenses, doesn’t cover most dental, vision, or hearing expenses, doesn’t cover most long-term care, and most of us will likely need to use more and more health care the older we get,” Ramthun said.
Kerry Hannon is a Senior Reporter and Columnist at Yahoo Finance. She is a workplace futurist, a career and retirement strategist and the author of 14 books, including "In Control at 50+: How to Succeed in The New Work of Work" and "Never Too Old To Get Rich." Follow her on Twitter @kerryhannon.
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