If Your HSA Offers This Benefit, You'd Be a Fool to Say No

When my husband switched jobs and our health insurance changed because of it, our out-of-pocket costs went up. But one silver lining was that our new health insurance plan made us eligible for a health savings account, or HSA.

An HSA is a special savings account you can use for medical expenses. It's similar to a flexible spending account (FSA), only an FSA makes you spend down your balance every year.

HSAs let you carry a balance forward as long as you want to. In fact, HSAs actually encourage you to hang on to your money because you can invest unused funds to grow your balance into a larger sum.

Eligibility for an HSA hinges on being enrolled in a high-deductible health insurance plan. In 2024, that means having an individual deductible of $1,600 or more, or a family deductible of $3,200 or more.

You may be inclined to pass on an HSA even if you're eligible for one. If you don't tend to get sick or see the doctor often, you may want to just hang on to your money rather than put it into a healthcare-designated account where you'll be penalized for non-medical withdrawals until age 65.

But you should know that HSAs offer a world of tax benefits. And if yours comes with one extra benefit, you'd be silly to say no to it.

When you get help funding your HSA

Just as some companies help employees by matching 401(k) contributions, so too do some employers fund HSAs on their employees' behalf. In fact, your employer might contribute funds to an HSA even if you don't contribute any money yourself. So if your health plan is compatible with an HSA and your employer offers that benefit, you'd basically be a fool not to open one.

Even if you don't expect to spend a lot on healthcare in the near term, over time, your medical spending might rise. It'll help to have an HSA balance you can tap once your healthcare spending needs increase.

Employer contributions count toward your annual limit

When your employer matches a contribution you make in your 401(k), it doesn't count toward your annual allowable limit. But HSAs work differently. With an HSA, funds that your employer contributes do count toward your maximum contribution for the year.

In 2024, you can put up to $4,150 into your HSA if you have self-only coverage, or up to $8,300 if you have family coverage. And there's a $1,000 HSA catch-up contribution available to savers aged 55 and over.

So let's say you're 29 years old and have self-only coverage. If your employer contributes $2,000 to your HSA on your behalf, it means the most you can contribute yourself is $2,150.

But either way, any money that lands in your HSA can be invested in a tax-advantaged manner. Investment gains in an HSA are tax-free, and so are withdrawals used for qualifying medical expenses.

Plus, HSA contributions are tax-free. So even if your employer is willing to kick in a nice amount of money, it pays to fund your HSA out of your own paycheck, too. It's a great way to shield some of your income from taxes while setting yourself up with funds to cover healthcare expenses whenever they arise.