The annual contribution limit for health savings accounts, or HSAs, will soon get a sizable boost due to inflation, the IRS announced this week.
For 2024, the yearly limit for self-only HSA plans is rising to $4,150 from $3,850 in 2023, and the cap for family plans is jumping to $8,300 from $7,750. The catch-up contribution for savers age 55 and older remains at $1,000 each, bumping the total deposit limit for older savers to $10,300.
It’s a “significant increase” when compared to historic HSA inflation adjustments, according to Ashton Lawrence, a certified financial planner and director at Mariner Wealth Advisors in Greenville, South Carolina.
Prior to 2022, the average yearly increase for the HSA contribution limit was roughly 1.6% per year, Lawrence said, and the jump from 2023 to 2024 for self-only and family plans will be about 8% and 7%, respectively. “It’s extremely advantageous for clients,” he added.
Clients ‘often overlook’ HSA tax benefits
You must have a high-deductible health insurance plan to qualify for HSA contributions. Qualifying plans require a deductible of at least $1,600 for self-only coverage or $3,200 for a family plan for 2024, according to the IRS.
But those who qualify may not fully understand how the accounts work. “Clients often overlook the investment and tax planning benefits of an HSA,” said Judy Brown, a CFP and senior financial advisor at SC&H Group in the Washington and Baltimore area. She is also a certified public accountant.
Health savings accounts offer three tax benefits:
- There’s an upfront “above-the-line” deduction for contributions that allows you to claim the tax break even if you don’t itemize deductions. And you can contribute up to the tax deadline, meaning you can make 2024 deposits up to the filing due date in 2025.
- Unlike pre-tax individual retirement accounts or 401(k) plans, which may also provide an upfront tax break, you can withdraw money anytime tax-free for qualified 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 that purpose. Some 62% of account holders spend the money on year-to-year or near-term expenses, according to an April 2023 report from the Employee Benefit Research Institute.
“The HSA is an excellent option to do something that the IRS rarely allows, which is having your cake and eating it as well,” with the initial tax break and future tax-free withdrawal, said Jim DeGaetano, a CFP and founder of Diamond Wealth Advisors in Carlisle, Pennsylvania. He is also a CPA.