Should You Contribute to an HSA in 2024?

Most people are familiar with savings accounts. Health savings accounts, or HSAs, less so. But they're a neat tool that could save you big time on taxes if you opt to participate, so it's important to understand how HSAs work and what benefits they offer.

An overview of HSAs

An HSA is a special account you open to save for medical expenses. The money that's contributed to an HSA goes in tax-free, so that's an immediate benefit. For example, contributing $2,000 to an HSA means you don't pay taxes on that much income.

Once you have money in an HSA, you can take withdrawals at any time. But if you don't need your funds right away, you can invest your balance in the hopes of growing it into a larger sum over time.

Investment gains in an HSA are tax-free (unlike gains in a brokerage account, which you pay taxes on year after year). And HSA withdrawals are tax-free as long as that money is used for qualified medical expenses.

Are you eligible for an HSA in 2024?

One problem with HSAs is that they're not available to everyone. Rather, you qualify based on the type of health insurance you have.

Your health plan needs to have a certain deductible for you to make contributions. In 2024, the minimum deductible requirement is $1,600 for self-only coverage and $3,200 for family coverage. Your plan must also have an out-of-pocket maximum of $8,050 for self-only coverage and $16,100 for family coverage.

If your plan meets these requirements, the HSA limits for 2024 are as follows:

• $4,150 for self-only coverage if you're under 55
• $8,300 for family coverage if you're under 55
• $5,150 for self-only coverage if you're 55 and older
• $9,300 for family coverage if you're 55 and older

Should you open an HSA in 2024?

If you're someone who doesn't tend to spend a lot of money on healthcare expenses, then you may be inclined to forgo an HSA next year. But that could be a huge mistake.

See, you don't have to take HSA withdrawals the year you make contributions. You can carry that money forward as long as you like -- all the way into retirement, even.

You may not have huge medical expenses now, but as people age, their healthcare spending tends to go up. And so even if you don't have a near-term need for an HSA to cover your medical expenses, you might really appreciate that pile of savings once you're retired. So if you can afford to part with some of your income, you might as well fund an HSA for the near-term tax savings and the eventual benefit of having access to that money.

And if you're still not convinced, think of it this way: Let's say you contribute $1,000 to an HSA next year and don't touch it for 30 years. If your HSA delivers an average annual return of 8%, which is a bit below the stock market's average, you'll grow that $1,000 into $10,000.

Also, you never know when you might suddenly get hurt or fall ill. So while you might think you don't need a lot of money on hand for medical expenses, things could change in an instant.

All told, there's not much of a downside to funding an HSA other than seeing a lower paycheck. If that's something you can swing, then it pays to pump money into an HSA next year, even if it's only a modest amount.