Health savings accounts (HSAs) aren't necessarily as well-known as long-term savings plans like IRAs and 401(k)s. That's actually a shame because HSAs are loaded with tax benefits.
HSA contributions are tax-free, and funds that aren't withdrawn right away can be invested for added growth. Investment gains in an HSA are tax-free, as are withdrawals to cover qualifying medical expenses. There can also be steep penalties for removing funds from an HSA for non-medical purposes.
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If you have an HSA, it's important to know the ins and outs of how it works. Here are some key points to keep in mind if you're new to saving in an HSA or have lost track of the rules.
1. Employer contributions count toward your annual limit
Like IRAs and 401(k) plans, HSAs have yearly contribution limits. In 2023, you can contribute up to $3,850 for self-only coverage or up to $7,750 for family coverage. In 2024, these limits will rise to $4,150 and $8,300, respectively.
Some employers contribute to HSAs on their employees' behalf. But contributions of that nature count toward whatever limit applies to you.
This is very different from a 401(k). Employers often offer matching incentives in 401(k)s, and those contributions don't count toward your annual limit. But let's say you're participating in an HSA in 2024 and have self-only coverage. If your employer is willing to contribute $2,000 to your HSA, you can only put in $2,150 -- for a combined total of $4,150.
2. Catch-up contributions begin at 55
If you're saving for retirement in an IRA or 401(k), you can begin making catch-up contributions to your account once you turn 50. HSAs allow for catch-up contributions, as well. But with an HSA, that option doesn't begin until age 55.
The catch-up contribution for an HSA is the same for an IRA -- $1,000. And to be clear, you can take advantage of that catch-up in your HSA whether you have self-only coverage or family coverage.
3. Funds can be withdrawn penalty-free for any reason once you turn 65
As mentioned earlier, there can be costly penalties for taking HSA withdrawals for non-medical purposes. As such, you may be inclined to proceed with caution when it comes to funding your HSA so you don't wind up with excess money.
But once you turn 65, you can withdraw money from your HSA for any purpose, without incurring a penalty. If you take a non-medical withdrawal starting at 65, you'll be taxed on it -- but you'll avoid being penalized.
For this reason, it does pay to pump as much money into your HSA as possible. Even if you end up with more money than you need for healthcare expenses in retirement, you can treat the remaining balance like a traditional IRA or 401(k) and remove funds, as needed.
HSAs are a really helpful savings tool. Make sure you know how these accounts work so you can make the most of yours.
