Tax season might be over, but it's never too early to start preparing for the next one by finding all of the possible deductions and benefits—especially if you're trying to decrease the amount you owe to the IRS every year (and who isn't?). One often overlooked tax write-off is a Health Savings Account or HSA, which is designed to help cover your medical costs and can also offer significant tax breaks if you're eligible. There are several ways to leverage an HSA, so we spoke with financial experts to understand what exactly this type of account is, why it's beneficial, and how you can get the most out of it.
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What Is a HSA?
A Health Savings Account allows you to set pre-tax dollars aside for medical expenses. If you have a high-deductible insurance plan, such an account can help you pay for qualified, out-of-pocket medical expenses like prescriptions, vision and dental care, co-pays, coinsurance, deductibles, first aid essentials, and more. These types of withdrawals aren't taxed and any money that's left over in your HSA can be rolled over to the next year.
How HSAs Work
As of 2024, individuals can contribute up to $4,150 for their coverage and $8,300 for family coverage. You don’t pay taxes on the amount of money you add to your HSA and won’t pay taxes when you take money out to pay for eligible health-related expenses, including healthcare costs your plan doesn’t cover.
In addition, you can use the funds from an HSA account to pay for expenses until you’ve reached your insurance plan’s deductible. Another great aspect of an HSA is using funds to “pay coinsurance or copays until you reach your out-of-pocket limit,” according to Blue Cross.
The Benefits of Having a HSA
HSAs are known to offer a "triple-benefit effect" because there are several advantages to having one, including paying less taxes.
“You get pre-tax savings, which reduces your yearly taxable income, and similar to a ROTH IRA, your money grows tax-free, and distributions for qualified medical expenses are also tax-free," explains Ramona Ortega, Founder of THRIVE Campaign and WealthBuild.ai.
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How to Qualify for a HSA
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“To qualify for an HSA, you need to opt for a high-deductible health plan (HDHP), which requires a minimum deductible of $1,600 for an individual or $3,200 for a family in 2024, "Ortega explains.
Other eligibility requirements include not being currently enrolled in Medicare, not being claimed as a dependent on someone else's tax returns, and having no other health coverage, such as being covered by a spouse's plan. You can sign up for a plan if your employer offers one (not all do), and self-employed plans are also available.
Why You Should Have a HSA
HSAs provide the unique opportunity to save up for medical costs but also serve as an investment vehicle.
"This dual purpose allows individuals to save for immediate healthcare needs while also planning for long-term medical expenses, making them highly versatile," says Shawn Plummer, a financial advisor and CEO of The Annuity Expert. "HSAs offer unmatched flexibility, letting you choose how and when to use your funds," which can enhance your financial planning strategy.
In addition, you don’t have to use all the funds you’ve contributed to your HSA. The money can stay in your account until retirement. If you’re 55 or older, there’s a bonus perk: You can contribute an additional $1,000.
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5 Ways to Maximize Your HSA Tax-Free Savings
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1. Maximize Contributions Annually
To maximize your tax deductions, contribute the highest amount allowed yearly to ensure you'll receive the most tax breaks. Unused funds roll over, so you can avoid spending the money within the year in an HSA unless necessary.
Just make sure to abide by any contribution limits. Many people mistakenly contribute more than the allowance, and doing so can rack up penalties and taxes, which can be costly.
"Excess contributions must be withdrawn and reported, which can be a hassle," Plummer explains.
2. Take Advantage of Employer Contributions
Some employers will match your HSA contributions, so take advantage of this opportunity and invest the maximum amount possible.
Look at it like it's free money that boosts your savings. And don’t forget, employer contributions are separated from your personal contributions, so max out your tax-free savings.
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3. Invest HSA Funds
With HSAs, you can invest the money in mutual funds or other investments for tax-free growth, another great benefit and way to maximize an HSA to your financial advantage.
"Diversifying your HSA investments can help protect against market volatility," Plummer says.
4. Reimburse Yourself Later
By keeping the funds in your account longer, you allow the money to grow, so if possible, hold off on reimbursing yourself for out-of-pocket medical expenses.
"Document these expenses thoroughly so you can claim them in the future," Plummer suggests. "This strategy can significantly increase the value of your HSA over time."
5. Utilize Catch-Up Contributions
For anyone reaching retirement age, super-sizing your nest egg should be a priority, and utilizing catch-up contributions with your HSA is a great benefit.
Contributions to your HSA can help boost your retirement savings. "Plan your contributions carefully to maximize these benefits in the years leading up to retirement," Plummer advises.
