With the constant increase in healthcare costs in the U.S., accumulating savings you can fall back on in case of a medical emergency has become a necessity. In fact, the Health Research Institute (HRI) projects the medical cost trend to be up to 7.0% in 2024. Luckily, keeping funds in a medical savings account can help you save a significant amount and even invest it further to increase your savings.
While there are several accounts that help you save money for medical expenses, a health savings account (HSA) is among the most popular options. In this article, we’ll reveal what an HSA is and how it works by looking into health savings account rules, contribution limits, benefits, and more.
What Is a Health Savings Account?
A health savings account is a tax-advantaged medical savings account that helps you collect money for qualified medical expenses, including dental, vision care, and prescription drug costs. If you use the saved funds for said medical expenses, HSAs offer triple tax advantages:
- Tax-free contributions—You don’t have to pay income taxes on the money you put in an HSA
- Tax-free growth—An HSA account lets you invest the collected funds in stocks or bonds to gradually grow your wealth since any gains, dividends, or interest you earn are free of tax
- Tax-free distributions—Any withdrawals you make and use for medical expenses are tax-free
Health Savings Account Rules for 2024
Opening an HSA is a great way to save money for medical expenses, but like any other savings account, it comes with specific limits and rules you should be aware of before you start contributing. The most important HSA savings account rules are related to:
- HSA contribution eligibility
- HSA contribution limits
- The use of funds saved in an HSA
Who Can Contribute to a Health Savings Account?
According to IRS rules, you can only open health savings accounts if you have a high-deductible health plan (HDHP). The minimum deductible in an HDHP in 2024 is $1,600 for individual savings plans and $3,200 for family coverage plans.
Besides meeting this criteria, you must also:
- Have no other health coverage (with a few exceptions)
- Not be claimed as a dependent by someone else for tax purposes
- Not be currently enrolled in Medicare
If you meet these eligibility requirements, you can contribute to an HSA. Any other person, such as your employer or a family member, may also contribute to your health savings account. The contributions must be made in cash, meaning you can’t contribute using stocks or property.
What Are the Health Savings Account Limits in 2023 and 2024?
The amount of money you can contribute to your account annually is determined by the plan you’re enrolled in, your age, and the maximum HSA contribution limits the IRS sets every year. Family coverage and self-only plans have different contribution limits, and if you’re older than 55, you can typically contribute an additional $1,000 as a catch-up contribution.
Here are the yearly health savings account contribution limits in 2023 vs. 2024:
Coverage Type | Contribution Limits 2023 | Contribution Limits 2024 |
Self-only coverage | $3,850 | $4,150 |
Family coverage | $7,750 | $8,300 |
If you and your employer are both contributing to your HSA, the contribution limits apply to the total amount you both contribute. For example, if the contribution limit is $4,150, and your employer contributes $1,000, you can only contribute $3,150.
Pay close attention to contribution limits when funding your HSA because exceeding the annual maximum limit can result in a 6% tax on the excess contributions. These are also considered taxable income, so you may be taxed in the year you overcontributed and any following year that you fail to remove the excess funds from your account.
What Can Money in a Tax-Advantaged Medical Savings Account Be Used For?
A health savings account lets you withdraw funds tax-free as long as you use them for eligible medical expenses. Here’s a list of some eligible health savings account expenses and those not approved by the HSA:
Eligible HSA Expenses | Ineligible HSA Expenses |
Dental treatmentFirst aid suppliesBlood sugar test kitsContact lenses and eyeglassesLaser eye surgeryCrutches and wheelchairsHearing aidsPhysical therapyBirth controlBreast pumpsFeminine hygiene productsOver-the-counter medication | Cosmetic surgeryCosmetics like deodorant, shower products, baby oil, and wipesSkincare Dental floss, toothpaste, or mouthwashHealthy foodGym membershipAromatherapy |
Besides using the money for health-related reasons, you can also use these accounts to save money for retirement. This is because they allow you to make tax-free contributions and withdrawals for any purpose after you turn 65, even though the withdrawals used for non-medical expenses are generally taxed if you’re younger than this age.
How Do Health Savings Accounts Work?
Whether you or someone else contributes to your HSA, the contributions in your account grow tax-free over time. If you’re on an employer-sponsored plan, the contributions are deducted from your paychecks. If you’re self-employed, however, the deductions are typically taken from your annual taxes.
Most of these accounts include debit cards you can use to buy prescription medications and pay for other qualified expenses. In case you don’t use up all the money you’ve saved in a year, the funds will remain in your HSA so you can use them to cover future medical expenses.
If you change your health insurance plan, find a new job, or retire, you can still use the account as you normally would as long as you adhere to HSA rules.
How To Set Up a Health Savings Account
Before setting up an HSA, you must enroll in an HDHP. If you decide to do this through your employer’s HR department, the process should be simple since most employer-sponsored HDHPs have an associated HSA provider you can work with.
However, you can also set up an HSA on your own by exploring the accounts offered at different banks, credit unions, and brokerages. If you decide to open an HSA through a brokerage, you can invest your contributions in bonds, stocks, or funds.
When choosing between your provider options, you should consider the following:
- Potential fees for opening or closing the account and monthly maintenance fees
- Banking services and features like debit cards and online banking
Once you pick a provider, you’ll have to fill out an application with the information in your HDHP. After your account is approved, you can start funding and using it for medical expenses.
Health Savings Account Benefits
Besides the tax advantages, among the main benefits of health savings accounts is the fact that they allow you to invest money in multiple assets. Other HSAs benefits include:
- No minimum distribution requirements
- Annual rollover
No Minimum Distribution Requirements
Most retirement accounts—like a traditional IRA and a 401(k)—have minimum distribution requirements that specify the least amount of money you must withdraw every month. Meanwhile, like Roth IRAs, HSAs don’t include these requirements, which means you can leave the money in the account and grow your investments for as long as you like.
Annual Rollover
While some health expense accounts like flexible spending accounts (FSAs) only let you carry over up to $640 (in 2024) into the following plan year, an HSA doesn’t impose such limits. Any amount of money you have left in the account at the end of the year carries over into the next one, and you can use it for future medical expenses.
Health Savings Account Limitations
While there are many benefits to opening a health savings account, there are also several drawbacks. These include:
- High-deductible requirement
- Taxes and penalties
- Potential fees
High-Deductible Requirement
To open an HSA, you must be enrolled in an HDHP, which requires you to pay higher out-of-pocket healthcare costs before the insurance company starts paying its share. While you will pay less in monthly premiums, you may struggle to find the cash to meet the deductible for pricey medical treatments. This may put more financial burden on you than other health insurance options like Preferred Provider Organizations (PPOs).
Taxes and Penalties
Withdrawing money from an HSA for non-qualified expenses before the age of 65 will result in income taxes on the withdrawn funds, and you’ll also have to pay a 20% penalty. This may be a huge disadvantage if you have unexpected expenses unrelated to health that you’re only able to cover with savings in this account since accessing the savings in an HSA leads to financial losses.
Potential Fees
Like other savings accounts, some HSAs include monthly maintenance fees or transaction fees, depending on your financial institution. These fees are typically low, but in the case of HSAs, they’re higher than the interest you may earn through your account.
This can take away from the funds you might need for unforeseen medical expenses. On top of this, most savings accounts don’t offer any special security features to keep your medical fund safe and intact for when you need it.
One way to circumvent these limitations is to consider putting your money in a high-security savings account. This account offers two main advantages when compared to health savings accounts:
- It lets you use the money for all kinds of expenses
- It protects your money from all types of scams
The only high-security savings account that offers premium interest rates is FortKnox by Austin Capital Bank. This account allows you to grow your savings and rest assured that they’re always in the safest place possible.