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September 26, 2024
The IRS announced an increase in the maximum contributions to Health Savings Accounts (HSAs) for 2025.
This change presents an excellent opportunity for individuals and families with high-deductible health plans to maximize their healthcare savings and take advantage of the various tax benefits HSAs offer.
New HSA Contribution Limits for 2025
Here’s a breakdown of the new contribution limits for HSAs in 2025:
- For Individuals: If you have a single high-deductible health plan, the maximum contribution amount for your HSA in 2025 is $4,300. This is an increase from $4,150 in 2024.
- For Families: For those with family coverage under a high-deductible health plan, the maximum contribution rises to $8,550 in 2025, up from $8,300 in 2024.
These adjustments allow HSA holders to save more money, which can significantly impact long-term healthcare and retirement planning.
More Than Just a Savings Account
HSAs are a type of savings account designed to help you pay for qualified healthcare expenses now and in the future. The key advantages of an HSA lie in its unique tax benefits often referred to as a "triple tax advantage":
1. Tax-Deductible Contributions: Money contributed to an HSA is tax-deductible, reducing your annual taxable income.
2. Tax-Free Growth: Funds in an HSA can be invested, and any growth—whether through interest, dividends, or capital gains—is tax-free.
3. Tax-Free Withdrawals: Withdrawals from an HSA are not taxed if they are used to pay for qualified medical expenses incurred since the account was opened. Qualified expenses include doctor visits, dental care, acupuncture, medications, etc.
Who is Eligible for an HSA?
To be eligible for an HSA, you must:
- Be enrolled in a high-deductible health plan (HDHP), an "HSA-Eligible Plan."
- The IRS defines a “high deductible health plan” as a health plan with an annual deductible of > $1,650 (for self-only coverage) or > $3,300 (for family coverage) and for which annual out-of-pocket expenses (not premiums) do not exceed $8,300 (self-only) or $16,600 (family coverage).
- The IRS defines a “high deductible health plan” as a health plan with an annual deductible of > $1,650 (for self-only coverage) or > $3,300 (for family coverage) and for which annual out-of-pocket expenses (not premiums) do not exceed $8,300 (self-only) or $16,600 (family coverage).
- Not be enrolled in Medicare.
- Not be claimed as a dependent on someone else's tax return.
- If you meet these criteria, an HSA can be a valuable tool for managing healthcare expenses and building savings for anticipated higher healthcare costs in the future.
One of the most strategic ways to use an HSA is to let the funds grow by not using them immediately for medical expenses. Here’s a strategy that can help maximize your HSA’s benefits:
1. Pay out of Pocket: If you can afford it, consider paying your current medical expenses out of pocket. This allows your HSA funds to remain invested and grow tax-free.
2. Save Your Receipts: Keep receipts for every medical expense you pay out of pocket from when you open your HSA. There is no expiration date on when you can reimburse yourself, so this documentation will allow you to withdraw the equivalent amount tax-free in the future.
3. Let Your Funds Grow: The longer your money stays in the HSA, the more it can grow. By the time you retire, you could have a sizable fund to help cover healthcare costs, which tend to be more expensive later in life.
Should You Have an HSA?
HSAs are a powerful financial tool, but they aren't for everyone. If you’re covered by a high-deductible health plan and meet the eligibility criteria, an HSA can provide significant tax advantages and long-term savings. However, deciding to open or fully fund an HSA depends on your individual tax and income situation.
If you’re unsure whether an HSA is right for you or how to maximize its benefits, we're here to help. Our team can analyze your specific financial and tax situation to determine if contributing to an HSA aligns with your goals. If you already have an HSA, we recommend fully funding it annually to maximize its tax-advantaged benefits.
HSAs can be a key component of a well-rounded healthcare and retirement strategy. By understanding and maximizing the benefits of an HSA, you can take a proactive approach to managing current and future medical expenses.
Not sure where to start? Contact us today!
References
https://www.irs.gov/pub/irs-drop/rp-24-25.pdf
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