Should You Max Out Your HSA in 2024?

Depending on your health insurance plan, you might be able to get an extra tax deduction. People who are covered by a qualifying high-deductible health insurance plan (HDHP), whether through an employer or via a plan bought at HealthCare.gov, can open a health savings account. This account, also known as an HSA, is a special tax-advantaged account that gives you extra benefits in paying for healthcare or saving for retirement.  

Once you have an HSA, it's important to understand the tax benefits and rules. Just like a traditional IRA, putting money into an HSA is tax deductible up to certain limits. For 2024, the IRS has announced that the contribution limits to an HSA are $4,150 for individuals with self-only coverage, or $8,300 for families. If you can use an HSA for 2024, you should consider maxing out your contributions. 

Let's look at three reasons why making the maximum contribution to your HSA could be a smart move for your personal finances in 2024. 

1. Save money for healthcare tax-free 

The first reason to use a health savings account is right in the name: You can use this account to save money for healthcare expenses that aren't covered by your insurance. And you get a tax deduction for the money you put into the HSA (your contributions) up to $4,150 for individuals or $8,300 for families in 2024. Withdrawals are also tax-free as long as they're used for qualified medical expenses.    

Your HSA can be used to pay for a wide range of IRS-approved qualified medical and dental expenses, including prescription drugs, eyeglasses and contact lenses, therapy, surgery, dental visits, orthodontia (braces), and more. If you want to be prepared to pay for big out-of-pocket costs for healthcare, or get a tax break for your kid's braces, consider making the maximum contribution to your HSA. 

Using an HSA to pay for healthcare lets you use pre-tax dollars to cover your medical and dental bills. Think of it this way: If you're in the 22% tax bracket, your HSA saves you $0.22 on taxes for every $1 you put into the account. So that means by getting that 22% tax break, your HSA is effectively giving you a 22% discount on the cost of healthcare. If your kid's braces cost $7,000 and you can pay for that entire expense with tax-deductible HSA money, it's like getting a 22% discount on braces ($1,540).  

2. Invest your HSA money for the future 

Even if you spend every dollar in your HSA on qualified medical expenses within the current calendar year, your HSA can still be a great deal. It helps you save money on taxes and makes those orthodontist bills a little less painful. Another way to use your HSA is as an investment account. 

What if you don't have a lot of medical bills and you have extra money left over in your HSA at the end of the year? No problem: HSAs are not "use it or lose it" like flexible spending accounts (FSAs). You own your HSA just like a brokerage account. You can keep your HSA for as long as you want, and the HSA typically lets you save and invest your extra cash in the account in ETFs and other investments.  

Don't need your HSA money this year, or for a few years? You can invest to make your healthcare dollars grow. And when you invest in an HSA, you don't have to worry about capital gains taxes or other taxes. Your HSA money grows tax-free! 

3. Get extra retirement income 

The third and perhaps most intriguing reason to max out your HSA is that you can use it as an extra source of retirement savings. After you reach age 65, you can take money out of your HSA (distributions) for any purpose without a penalty, but you will owe income tax on non-healthcare withdrawals. 

That's right. If you don't use all your HSA money for healthcare, if instead you invest it and let it grow, it can be another source of retirement income. Think of your HSA as an extra retirement account, like a traditional IRA or 401(k). 

Bottom line: Not everyone can open a health savings account. To get an HSA, you must have a qualifying high-deductible health insurance plan (HDHP). But if you have the right health insurance plan, an HSA can be the perfect way to get a tax deduction, tax-free investment growth to pay for future healthcare expenses, and another source of retirement income.