High-deductible health insurance plans aren't something most people see as desirable, but they have one key benefit that low-deductible plans don't: the opportunity to contribute to a health savings account (HSA). It's not an option I have this year, but I wish I did so I could take advantage of the following three benefits.
1. Contributions reduce your taxable income
The money you put into an HSA reduces your taxable income for the year, just like contributions to traditional IRAs or 401(k)s. This saves you money at tax time. It could even be enough to drop some people into a lower tax bracket, depending on their income and how much they contribute to an HSA this year.
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Those with individual health insurance plans with a deductible of $1,600 or more may contribute up to $4,150 to an HSA in 2024. Those with family plans with deductibles of $3,200 or more may contribute up to $8,300. And adults 55 and older may add an extra $1,000 to the above limits. Your health insurance plan's annual out-of-pocket maximum also can't be above $8,050 for single coverage or $16,100 for family coverage.
2. Medical withdrawals are tax-free
HSAs were created to help people cover their out-of-pocket medical expenses. That's why they offer tax-free medical withdrawals at any age. This includes treatment you receive at a doctor's office or hospital as well as things like over-the-counter and prescription medications, and dental and vision care. But it doesn't cover cosmetic procedures.
HSA funds don't expire like flexible spending account (FSA) funds, so you can roll over your funds from one year to the next. You can also continue to use your HSA funds even if you later lose your eligibility to contribute to one.
3. It can double as a retirement account
Some HSA providers enable you to invest your funds, so it's possible to use yours as a retirement account if you choose. You'll get the upfront tax break for contributing, as discussed above, and you can take non-medical withdrawals as well. However, you'll pay taxes on these, plus a 20% penalty if you're under 65.
It's a great place to stash extra savings if you don't have access to a workplace retirement plan. But if you plan to use it for retirement, make sure to verify your eligibility and the contribution limits each year, as they change over time.
You may also want to avoid taking medical withdrawals if possible. Consider saving for various expenses in a high-yield savings account. Draw upon these before tapping your HSA.
You're free to use your HSA in the manner that works best for you -- or not at all if you prefer other accounts. But keep it in the back of your mind if you're looking for a place to stash extra cash in 2024. Its tax advantages are hard to beat, and it could pay off for you big time in retirement or the next time you need medical care.
