Health Spending Accounts (HSAs): Getting the Most From the IRS

Did you know that health savings accounts, also known as HSAs, can help you get the most from the IRS (Internal Revenue Service)?

That seems like a misnomer. Getting the most from the IRS? Doesn't it seem like they are always expecting more and more from you rather than giving?

Well, here is an opportunity that you won’t see come along often. The IRS is boosting HSA limits for 2024. And that could be a huge payoff for you.

Some couples may be able to put more than $10,000 into their HSA plan in 2024. The reason for this is that inflation has risen significantly in the past few years and to try to keep up with it, the IRS is raising the contribution limits.

Let’s break this down.

For 2024, the maximum contribution for a family is $8,300 and $4,150 for an individual. However, for participants 55 years old or older, they can contribute an additional $1000. This means that an older married couple could put away $10,300 a year, up from $9,750 this year.

This is a record percentage increase. Generally, the increase is only about 1.5% or $100 - $200, if any increase at all. 

What is a Health Savings Account and How Can It Help Me? 

Many people don’t fully understand the advantages of the HSA. It is misunderstood and underutilized. If used correctly it can be seen as one of the best retirement saving accounts.

The HSA is a triple tax-free savings account and one of the best tax breaks in the tax code. 

The HSA is designed to help people pay for medical expenses, including deductibles, copayments, vision, dental hearing out of pocket as well as long-term care expenses. However, there are requirements to open one.

You must have a HSA-qualified high-deductible plan and you cannot be enrolled in Medicare. For those of you who are in an Affordable Care Act or employer-sponsored plan that is a high deductible plan, review your options.

The money you contribute can roll over from year to year if not used. It comes out of your paycheck before taxes, funds can be invested and grow tax-free and when used correctly comes out tax-free.

Review your employer benefits package, because some employers may make a deposit into your HSA on your behalf.

How Can I Best Maximize My HSA? 

To maximize an HSA to use for out-of-pocket expenses in retirement, you need to contribute as much as possible, then invest your contribution. Don’t just leave cash in the account, which has no growth. Then, limit your withdrawals.

If you have a high deductible plan but don’t use your insurance that often, and you are younger and do not have a pension, this may be the way to go.

An article printed in USA Today gave an example of how useful this can be.

Assume a 30-year-old contributes $8,300. They contribute the maximum amount to an HSA yearly and invest it, with an annual assumed rate of 5% growth. 

By age 65, the balance could be between $700,000 and $800,000. However, if left in cash and not invested, the balance would only be $350,000 earning an assumed rate of 1%.

You can see that taking advantage of the HSA and investing your money in the account can provide you with significant funds for healthcare costs in the future. Of course, you need to have a good cash flow to pay for your current medical expenses prior to retirement. 

The earlier you start, the better off you are. Keep in mind that the cost of healthcare increases the older we get.

It's also important to note that the HSA funds can be used for emergency funds. There is no timeline as to when the funds need to be used.

Conditions of Accessing Your Health Savings Account

If you’re under 65 years of age, withdrawals for unqualified medical expenses are subject to a penalty and income tax.

According to the IRS, qualified medical expenses include, "the costs of diagnosis, cure, mitigation, treatment, or prevention of a disease, and for the purpose of affecting any part or function of the body."  The HSA Store will allow you to look up a specific product to see if it is considered a qualified expense and therefore covered.

The penalty goes away when you turn 65. This is the same concept as penalties for early withdrawals on your IRA. 

The income tax you pay is the ordinary income tax of the full amount withdrawn, just like an IRA.

Even if you individually don’t qualify for the HSA based on your medical insurance not being a high deductible plan, perhaps your spouse can take advantage of one, even if only for a single enrollee and your income isn’t a consideration when opening an HSA. 

HSAs can benefit you now and in the future. When deciding if it is right for you, determine your full out-of-pocket cost for a high-deductible plan. Don’t just consider the premiums. Also, determine how much you are paying for other over-the-counter drugs some of which can be covered.

If you anticipate more out-of-pocket expenses when you retire, or after age 65, consider using an HSA. Try to take advantage of every benefit that you’re offered, especially if you realize more money in your pocket (perhaps a smaller tax bill?)