(DailyChive.com) – Healthcare expenses are a source of anxiety for many Americans. After purchasing a High Deductible Health Plan (HDHP) through the Healthcare Marketplace, you may wonder what the best method of saving for healthcare costs is. This article will cover everything you need to know about a special type of account called a Health Savings Account (HSA), including the benefits, the contribution and income limits, and how it differs from a similar account called an FSA.
What is an HSA?
An HSA is a savings account designed to hold pre-tax money to help people pay for qualified medical expenses. The funds in these accounts are subject to specific rules and uses, but the tax-deferred benefits mean that the money in the account can go further toward your medical expenses because withdrawals and any investment gains accumulated by the account that goes toward qualified medical expenses are not subject to tax.
You can use the funds in your HSA to pay for qualified medical expenses such as deductibles, copayments, coinsurance, and some other healthcare expenses that are not covered by your High Deductible Health Plan purchased through the Healthcare Marketplace.
These special accounts generate interest like any other investment account, but the money withdrawn and used for qualified medical expenses is exempt from tax, so your savings go further where you need them most.
How is HSA Different From an FSA?
A Flexible Spending Account (FSA) functions in a similar way, allowing you to use funds from the account to pay for out-of-pocket healthcare costs, but cannot be used with insurance purchased through the Healthcare Marketplace. An FSA has different contribution limits, and these accounts are offered through an employer. Money put into a FSA has to be used by a certain deadline, while HSA money can roll over year-to-year.
Contribution and Income Limits
There are no income limits to contributing to an HSA, and contributions made from families in all income levels qualify for the same 100% tax deduction. As of 2023, the contribution limits have risen to $3,850 for an individual and up to $7,750 for an account used for expenses for multiple members of a family. This limit applies to the maximum amount that can be contributed by both an employee and any contributions made by the employer into the account.
Because of continuing inflation, the IRS has continued to raise the permitted contribution limits to account for increased charges across the board from healthcare-related costs. In 2024, an employer and an employee together can contribute up to $4,150 into an account that is only drawn on by one person, and up to $8,300 for an account that accommodates the expenses incurred by a family.
Both years allow for a catch-up contribution of an additional $1000 to any account holder over 55. This means that the maximum tax-deductible funds in the accounts for 2023 would be $4,850 for an individual account and up to $8,750 for a family.
Because HSAs are designed to benefit persons with HDHPs primarily, their benefits are seen when compared to the deductibles and maximum out-of-pocket expenses offered on Marketplace insurance plans.
Deductibles:
- 2023 Deductible for single tax filers- $1,500
- 2023 Deductible for joint tax filers- $3,000
Maximum Out-of-Pocket Expenses
- 2023 Maximum out-of-pocket expenses- $7,500
- 2023 Maximum out-of-pocket expenses- $15,000
Bottom Line
A Health Savings Account is a smart investment opportunity to save for medical expenses if you currently have an HDHP. You can contribute up to the annual limit and withdraw from the account without being taxed for your contributions of interest as long as the funds are used to pay for qualifying healthcare expenses. Because these accounts are available to persons of any income and age, they may be a wise choice for anyone who expects medical expenses to come up while they are covered by an HDHP.
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