Healthcare is an expense that could eat away at a lot of your income. That makes it an important expense to save for.
You have options when it comes to socking funds away for healthcare spending. But if you're eligible for a health savings account, or HSA, then it definitely pays to open one due to the tax benefits these accounts are loaded with.
If you're opening your first HSA in 2024, you may not fully understand how your plan works. Here are a few key points to keep in mind.
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1. You don't have to spend down your plan balance by the end of the year
If you've ever saved in a flexible spending account (FSA), you may be used to having to rush to spend down your plan balance every year or otherwise risk forfeiting funds. But thankfully, HSAs give you a lot more flexibility with your money.
With an HSA, there's no deadline to use up your balance. In fact, it could actually work to your benefit to not spend your entire plan balance year after year.
The reason? HSAs let you invest unused funds, and gains in your account are tax-free. So if you don't need all of the money you contribute in 2024, don't use it all. Instead, keep it invested so you can access a larger sum of money in the future.
2. Your contribution limit hinges on the type of health coverage you have and your age
Every dollar you put into an HSA is a dollar of earnings the IRS can't tax you on. But it's important to know what your personal HSA contribution limit is, and that will depend on your age and coverage type.
If you're under 55, your 2024 contribution limit is:
- $4,150 for self-only coverage
- $8,300 for family coverage
If you're 55 or older, your 2024 contribution limit is:
- $5,150 for self-only coverage
- $9,300 for family coverage
You should also know that any funds your employer contributes to an HSA on your behalf count toward the aforementioned limits. So if you're 40 with self-only coverage and your employer kicks in $1,000 toward your HSA, you can only put in another $3,150 yourself.
3. You generally can't have an HSA and an FSA at the same time
When it comes to saving for healthcare in a tax-advantaged plan, you generally need to choose between an HSA and FSA, as you can't have both at the same time. You may, however, be eligible to have an HSA in conjunction with what's known as a limited purpose FSA.
A limited purpose FSA generally allows you to set aside pre-tax dollars for dental and vision-related spending. Some limited purpose FSAs allow you to use your balance for general medical expenses once your annual health plan deductible has been met. If you're interested in opening a limited purpose FSA on top of an HSA, you'll need to check your plan's rules carefully to know what you can use that FSA for.
HSAs are a really useful savings tool, so if you're eligible for one in 2024, it pays to take advantage. But also, read up on the rules so you're able to make the most of your account.
