This Tax-Advantaged Account Could Lower Your IRS Bill -- but Only if You Qualify for It

At this time of the year, a lot of people have taxes on the brain. And whether you're looking at getting a refund or having to write a check to the IRS, you may be focused on doing what you can to save money on your taxes going forward.

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There's one account that can help you not only shield some income from the IRS but also enjoy tax-free investment gains and tax-free withdrawals. But you need to meet certain requirements to sign up for it.

The benefits of HSAs

People tend to confuse health savings accounts (HSAs) with flexible spending accounts (FSAs). But they're actually quite different from one another.

Both accounts let you contribute pre-tax dollars to cover qualifying medical expenses. So putting $1,000 into either account means you don't pay taxes on $1,000 of income.

But with an FSA, you can't invest unused funds. And you generally have to use up your balance each year or risk forfeiting some of the money you've saved.

With an HSA, you can invest unused funds. And you don't have to deplete your plan balance every year. In fact, you're actually encouraged not to tap your HSA every time medical bills arise, because if you have money in your account that stays invested, you can enjoy tax-free gains. Plus, HSA withdrawals are not taxed as long as that money is used to cover qualifying medical bills.

Are you eligible for an HSA?

Qualifying for an FSA is much easier than qualifying for an HSA. For the latter, your health insurance plan has to meet certain requirements that can change from one year to the next.

In 2024, your health plan needs a minimum deductible of $1,600 if you have self-only coverage (meaning, it's just you on your plan), or a minimum deductible of $3,200 for family coverage (meaning, you plus at least one other family member). Your health plan also needs to have an out-of-pocket maximum of $8,050 this year for self-only coverage, or $16,100 for family coverage.

If your plan meets one of these requirements but not the other, an HSA is off the table this year. However, it may be an option in the future. It pays to check your eligibility every year.

Don't assume that being eligible for an HSA one year renders you eligible the following year. Even if you stay on the same health plan, HSA rules can shift from one year to another, so it's important to always check.

Take advantage if you can

HSAs are an extremely helpful and flexible savings tool. It pays to not only sign up if you're eligible, but contribute as much money as possible.

This year, HSAs max out at $4,150 for self-only coverage if you're under age 55, or $5,150 for self-only coverage if you're 55 or older. For family coverage, the limits are $8,300 and $9,300, respectively.

Even if you can't max out your HSA, putting any amount into one of these accounts can serve as a nice tax break. So it pays to enjoy that savings if you can.