If you hate paying taxes (and most of us do), the IRS announcement that some couples may be able to make more than $10,000 next year in their health savings accounts should sound music to your ears.
To keep up with the rampant inflation of the past few years, the IRS said last week that it is boosting by a record how much people can contribute to HSA next year. For 2024, the maximum HSA contribution will be $8,300 for a family and $4,150 for an individual, up from $7,750 and $3,850, respectively, in 2023. Participants age 55 or older can contribute an additional $1,000 , which means that an older couple can move away. $10,300 a year, up from $9,750 this year. Typically, HSA caps are only boosted each year by about 1.5%, or $100 to $200, if any.
Health savings accounts (HSAs), often overshadowed by the well-known 401(k) and individual retirement accounts (IRAs), are viewed as one of the best retirement savings accounts despite their name and their lack of use by most Americans, according to the Employee Benefits Research Institute. (EBRI).
“It’s a triple tax-exempt account,” said Zack Ungerot, senior wealth advisor at Hightower Wealth Advisors. “It’s one of the best tax breaks in the tax code. You don’t pay tax on any of that money, if it’s used properly.”
Pros and Cons:Guide to Health Savings Account (HSA) Rules
Protect your assets: The best high-yield savings accounts for 2023
Compare the benefits:What is FSA, HSA, 529? How they work and how they are used to lower taxes and build wealth.
What is HSA and how does it work?
HSAs are intended to be tax-advantaged accounts to help people save for medical expenses, including deductibles, co-payments, vision, dental, hearing, and even long-term care. To open one, you must have an HSA-eligible high-deductible health plan and not be enrolled in Medicare.
Contributions to the HSA are immediately tax-deductible, which means if a 55-year-old couple with a household income of $100,000 and a tax rate of 22% contribute to next year’s maximum of $10,300, they’ll save $2,266 in taxes, Jason Bornhorst said, Co-founder and CEO of benefits platform First Dollar.
“Just that tax savings alone will pay for a family vacation for most people,” he said.
there is more. Contributions can be invested and grow tax free. After that, distributions at any age to pay for qualified medical expenses are tax deductible.
This “triple tax advantage” for account holders enables people to increase more money for healthcare expenses than they would otherwise, and it’s better than those in a 401(k) or IRA, both traditional and Roth. Contributions to an employer-sponsored 401(k) and traditional IRA are taxed while Roth IRA funds are taxed.
Watch your taxes:Tax diversification can help you save. Here’s what to consider with your retirement funds.
taxation:Your Retirement Savings Can Take A Big Hit: What You Need To Know About Taxes
How do you maximize your HSA?
To maximize the HSA, people need to contribute as much as possible, monetize their contributions and limit withdrawals, if possible, to allow for compound growth. Unfortunately, most people use HSA to pay for current expenses, contribute little, and invest “relatively little,” the institute said. It is estimated that only 12% of account holders invested their health accounts in non-cash assets in 2021.
- To illustrate how important the investment is, suppose a 30-year-old contributes $8,300, the maximum family amount in the next year and invests it, with 5% annual growth and more annual contributions. By age 65, Ungerot said, the balance may be between $700,000 and $800,000 that can be used for qualified medical expenses. That compares to about $350,000 if you were left with the cash to earn about 1% annually, he said.
Medical expenses in retirement can be significant, EBRI said, with couples likely needing to save up to $383,000.
Prepare financially:Do you want to prepare yourself for a secure retirement? Then make these 3 money moves in your 40s.
Long term health expenses:Time to Talk: How Seniors Can Avoid Financial Ruin by Planning for Long-Term Health Care Now
HSA as an emergency fund, pension piggy bank, IRA?
Savvy users also use the HSA as an emergency fund or piggy bank. Because there’s no timeline showing when you should reimburse yourself, you can compile records of medical expenses and use them to withdraw tax-free HSA money whenever you need emergency cash or just to spend when you reach 65 years of age, said Ryan Lucy, executive vice president. From the accounting firm PIASCIK.
“The wealthy will use it as a piggy bank, but you have to have the cash flow” to pay medical expenses out of pocket for years and keep accurate records, he said.
If you are under the age of 65, withdrawals for nonqualified medical expenses are subject to a penalty and income tax. The penalty disappears when you’re 65, Bornhorst said, which essentially converts an HSA into an IRA if you don’t have qualifying medical expenses.
“You only pay ordinary income tax on what you withdraw, as you do with an IRA,” he said.
Medora Lee is USA TODAY’s money, markets and personal finance correspondent. You can contact her at [email protected] and sign up for the free Daily Money newsletter for personal financial advice and business news every Monday through Friday morning.
#limit #health #savings #accounts #record #increase #bother