The IRS’s news that some couples may be able to save more than $10,000 next year in their health savings accounts should be music to your ears if you detest paying taxes, as the majority of us do.
The IRS announced last week that it is raising the maximum amount that consumers can donate to their HSAs for the coming year by a record amount in order to keep up with the recent years’ excessive inflation. The maximum HSA contribution will increase from $7,750 and $3,850, respectively, in 2023 to $8,300 for a family and $4,150 for an individual in 2024. An older married couple might save $10,300 per year, up from $9,750 this year, because participants age 55 and over are eligible for an additional $1,000 contribution. The average annual increase in HSA cap amounts is only 1.5%, or $100 to $200, if they are increased at all.
According to the Employee Benefit Research Institute (EBRI), despite their name and the fact that most Americans underutilize them, health savings accounts (HSAs), which are frequently overshadowed by the more well-known 401(K) and individual retirement accounts (IRAs), are regarded as one of the top retirement savings accounts.
According to Zach Ungerott, senior financial advisor at Hightower financial Advisors, “it’s a triple tax-free account.” It’s one of the tax code’s best tax benefits. If employed properly, you never pay taxes on any of the money.
How do HSAs operate and what are they?
HSAs are designed to be tax-advantaged accounts that aid in saving for medical costs such as coinsurance, deductibles, vision, dental, and hearing care as well as long-term care. You must not be enrolled in Medicare and have a high-deductible health plan that is HSA-eligible in order to open one.
According to Jason Bornhorst, co-founder and CEO of benefits platform First Dollar, contributions to an HSA are immediately tax deductible, which means that if a 55-year-old couple with household income of $100,000 and a 22% tax rate makes the maximum contribution next year of $10,300, they will immediately save $2,266 in taxes.
“Just those tax savings alone will pay for most people’s family vacation,” he declared.
And there’s more. Contributions are able to increase tax-free when invested. Then, distributions are tax-free at any age for eligible medical expenses.
In comparison to 401(k)s and IRAs, both regular and Roth, this “triple tax advantage” to account holders allows consumers to stretch their money designated for medical bills further than they otherwise might. Roth IRA contributions are taxed upon entry, but contributions to employer-sponsored 401(k)s and standard IRAs are taxed upon withdrawal.
How may an HSA be maximised?
People must invest their contributions, contribute as much as they can, and, if at all feasible, limit withdrawals in order to maximise their HSA. Sadly, according to EBRI, most people use their HSAs to cover immediate needs, make small contributions, and “relatively few” invest. In 2021, it was predicted that only 12% of accountholders had invested their HSAs in assets other than cash.
HSA as an IRA, retirement savings account, or emergency fund?
Smart customers also use the HSA as a savings account or emergency fund. According to Ryan Losi, executive vice president of accounting firm PIASCIK, since there is no deadline for when you must reimburse yourself, you can accumulate records of medical expenses and use them to withdraw HSA funds tax-free to pay yourself back whenever you need emergency cash or just to spend when you turn 65.
“Wealthy people will use it as a piggy bank, but you have to have cash flow” to cover medical costs out of pocket for years and maintain thorough records, he said.
Withdrawals for unqualified medical costs are subject to a penalty and income tax if you’re under 65. If you don’t have qualifying medical expenses, the HSA essentially becomes an IRA after the penalty expires at age 65, according to Bornhorst.
As with an IRA, “you just pay ordinary income tax on what you withdraw,” he noted.