There's a reason HSAs, or health savings accounts, are often touted as one of the best savings plans out there. They're the only plan to offer three different tax breaks.
With an HSA, contributions go in on a pre-tax basis, allowing you to shield some income from the IRS. HSA funds that aren't withdrawn immediately can be invested for added growth, and those gains are tax-free. HSA withdrawals are also tax-free when used to cover qualifying medical expenses.
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But there are restrictions when it comes to funding an HSA. To qualify, you need to be enrolled in a high-deductible health insurance plan. In 2024, that means having a minimum deductible of $1,600 for self-only coverage, or a minimum deductible of $3,200 for family coverage.
Your health plan must also have an out-of-pocket maximum of $8,050 or less for self-only coverage to be HSA-eligible next year. For family coverage, your out-of-pocket maximum needs to be $16,100 or less.
Because of these rules, not everyone will qualify for an HSA in 2024 -- or in future years, since the requirements for HSAs can change from one year to the next year. But if you're eager to enjoy the most tax benefits in the course of your savings, there's another account you can look at.
Two out of three ain't bad
Snagging three different tax breaks in one account is a great thing. But if an HSA isn't an option for you, you can look at a Roth IRA instead.
With a Roth IRA, you won't get a tax break on the money that goes into your account. But investment gains in a Roth IRA are tax-free, and so are withdrawals.
That's huge, because once you retire, you may find that money gets tighter. Not having to hand a portion of your withdrawals over to the IRS in tax form could lift a huge weight off your shoulders.
Furthermore, because Roth IRAs are designed to function as a general savings account for retirement, you can take withdrawals for any purpose and avoid taxes on that money as it leaves your account. HSAs do allow you to take non-medical withdrawals without a penalty once you turn 65. But in that case, those withdrawals are subject to taxes.
Are you able to fund a Roth IRA?
Just as there are rules for HSA eligibility, so too do rules apply to Roth IRA contributions. Only with a Roth IRA, eligibility hinges on your income, not your health insurance plan.
In 2024, Roth IRA eligibility starts to phase out at $146,000 of income if you're a single tax-filer. And if you earn more than $161,000, you can't contribute at all.
If you're married filing a joint tax return, in 2024, eligibility starts to phase out at $230,000. And contributions are barred if your joint income exceeds $240,000.
That said, if you're not able to fund a Roth IRA directly in 2024, you can always put money into a traditional IRA and then convert it after the fact. There may be an associated tax bill with that conversion, depending on your situation.
HSAs are a fantastic savings tool. But if you're not able to fund one, don't fret. Instead, enjoy two out of three of the tax benefits you'd otherwise get by turning to a Roth IRA.
