Just as it's a good idea to save for retirement in a tax-advantaged manner, it's also wise to reap some tax benefits in the course of saving for future medical expenses. Healthcare is one of those costs that's always present -- and always has the potential to be expensive. This especially holds true later in life, since that's when medical issues tend to arise.
There are different ways you can set money aside for healthcare, but if you're able to fund a health savings account, or HSA, it pays to do so. That's because HSAs offer three distinct tax breaks.
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First, there's a tax break on contributions. HSAs let you contribute money tax-free, just like traditional IRA or 401(k) plans.
Next, you can invest HSA funds you don't need to withdraw right away. Any investment gains in your HSA will be yours to enjoy tax-free.
Finally, HSA withdrawals used for qualified medical expenses are tax-free, as well. In this regard, HSAs are similar to Roth IRAs and 401(k)s.
But if you're going to participate in an HSA in 2023, it's important to know the rules. It's also in your best interest to avoid these mistakes.
1. Assuming your health plan is still compatible
There can be penalties for funding an HSA when you aren't eligible to do so. And if your health coverage is changing in 2023, it could mean that contributing to an HSA is no longer an option for you.
Each year, there's a minimum deductible your plan has to come with to be HSA-compatible. This year, it's $1,400 for self-only coverage and $2,800 for family coverage. But in 2023, the minimum deductible for an HSA is rising to $1,500 for self-only coverage and $3,000 for family coverage. If your plan isn't eligible, you won't be able to fund an HSA.
Similarly, if you're signing up for Medicare in 2023, you can no longer fund an HSA. This applies even if you're only enrolling in Medicare Part A as secondary insurance and keeping your group health plan from your job as your primary coverage.
2. Not knowing that contribution limits are rising
Right now, HSAs max out at $3,650 for self-only coverage and $7,300 for family coverage. There's also a $1,000 catch-up contribution you can make if you're 55 or older.
Next year, the HSA limit for self-only coverage is increasing to $3,850, while the limit for family coverage is rising to $7,750. The $1,000 catch-up is staying the same. If you're able to max out your HSA at these new levels, you'll have more money available to cover near- and long-term medical costs.
3. Spending HSA funds right away
You're absolutely allowed to tap your HSA any time you incur medical costs -- even if it's just weeks after opening your account. But doing so could mean losing out on the chance to grow your money in a tax-advantaged manner.
If you have an HSA, your best bet is generally to not touch it for a few decades so you can grow your money into a large sum. If you're able to pay your near-term healthcare costs separately, do so.
As a reminder, the money in your HSA never expires. So you can fund an HSA in your 20s and use that money in your 70s or 80s to cover your healthcare needs then.
Don't make a mistake you'll regret
The rules of HSAs can be a little tricky and also change from one year to the next. Be sure to read up on HSAs so you're able to make the most of your account -- in 2023 and beyond.
