Millions of Americans are now using health savings accounts (HSAs) to cover medical expenses. I just signed up for one myself along with the high-deductible health plan offered by my employer for the first time this benefit renewal season.
But here’s a warning if you’re using an HSA: Make sure you don’t exceed the annual contribution limits. If you do, you could be hit with a stiff penalty and lose out on expected tax benefits. That’s why it’s so important to know and understand the HSA contribution limits that apply each year.
So, if you’re planning to make additional contributions to your HSA in 2023, or you’re thinking about signing up for an HSA in 2024 and want to know how much you can put in the account next year, I’ll provide all the necessary information so you don’t go over the applicable contribution limit. I’ll also fill you in on the tax breaks that go along with HSAs, the deadline for making HSA contributions, and more in case you plan to join me as an HSA owner.
What Is a Health Savings Account?
A health savings account is a tax-advantaged account used to save for and pay qualified medical expenses. Contributions to an HSA can be made by the account holder or anyone else, including the account holder’s employer or family member. You can also invest money in an HSA; thus, it can grow faster than money in a simple savings account.
You’re only allowed to contribute to an HSA (or have someone else contribute on your behalf) if all the following are true:
- You’re covered under a high-deductible health plan on the first day of the month
- You don’t have other health insurance coverage
- You aren’t enrolled in Medicare
- You can’t be claimed as a dependent on someone else’s tax return for the year
Only cash contributions are allowed. You can’t contribute stock or property to an HSA.
Even though HSAs are often available through an employer-sponsored health insurance plan, you can keep an HSA if you change jobs or retire (i.e., it’s “portable”).
Now let me explain some of these HSA features and requirements in a bit more detail.
Tax Benefits for HSAs
HSAs come with three main tax benefits:
- You get a tax break when you put money into an HSA. You can deduct contributions you make to your own HSA. If your employer puts money in your HSA, those contributions aren’t included in your taxable income either.
- Money in an HSA can grow on a tax-free basis. Unlike money in a taxable brokerage account or savings account, you don’t pay income tax year after year on the interest or earnings generated by the investment of your HSA funds.
- Distributions from an HSA that are used to cover health care costs are also tax-free. If you’ve already paid a medical bill, but pull money out of an HSA to reimburse yourself, that also counts as a tax-free distribution.
However, if you use HSA funds for something other than a qualified medical expense, you’ll owe federal income tax on that money and might be hit with a 20% penalty by the Internal Revenue Service (IRS). The penalty won’t apply to distributions made after you become disabled, turn 65 years old, or die.
Qualified Medical Expenses
Qualified medical expenses for HSA purposes are generally the same as medical costs that qualify for the medical and dental expenses deduction when you file your tax return.
You can use HSA funds to pay medical bills for yourself, your spouse, any person claimed as a dependent on your return, or any person you could have claimed as a dependent except that either:
- The person filed a joint tax return.
- The person had gross income of $4,700 or more (for 2023).
- You, or your spouse if you’re filing a joint return, could be claimed as a dependent on someone else’s tax return.
If a child’s parents are divorced, separated, or living apart for the last six months of the year, the child is treated as the dependent of both parents for HSA purposes.
YATI Tip: If you pull money from an HSA to pay medical expenses, you can’t deduct those expenses as an itemized deduction.
High-Deductible Health Plan Requirements
If you want to contribute to an HSA, your high-deductible health plan must also satisfy certain requirements. First, for 2023, it must have an annual deductible of at least $1,500 for self-only coverage ($1,600 for 2024) or $3,000 for family coverage ($3,200 for 2024).
Second, for 2023, the maximum out-of-pocket expenses paid under a high-deductible health plan can’t exceed $7,500 for self-only coverage ($8,050 for 2024) or $15,000 for family coverage ($16,100 for 2024). Out-of-pocket expenses include deductibles and copayments, but it doesn’t include health insurance premiums.
How Much Can You Contribute to an HSA?
The maximum amount you can put in an HSA is adjusted for inflation each year. So, the maximum contribution limit typically goes up every year. (HSA contribution limits for 2023 and 2024 are below.)
If you’re at least 55 years old at the end of the year, you can contribute an additional $1,000 on top of the HSA contribution limit for the year. The additional contribution—commonly known as a “catch-up” contribution—isn’t adjusted for inflation, so it stays the same from year to year.
Your contribution limit for the year is reduced by any amount contributed to an Archer medical spending account (MSA) in your name or contributed by your employer to an HSA in your name. It’s also reduced to zero starting with the first month you’re enrolled in Medicare (including periods of retroactive Medicare coverage).
2023 HSA Contribution Limits
If you want to put more money in an HSA this year, make sure you don’t exceed the applicable contribution limit. Limits are based on either people with self-only coverage or family coverage.
The 2023 HSA contribution limits are:
- $3,850 for self-only coverage
- $7,750 for family coverage
2024 HSA Contribution Limits
It’s that time of year when workers are signing up for the 2024 health insurance benefits offered by their employer. If you’re checking out an HSA, you’ll want to know how much you can squirrel away in an HSA in 2024.
The 2024 HSA contribution limits are:
- $4,150 for self-only coverage
- $8,300 for family coverage
When Can You Contribute to an HSA?
You can start contributing to an HSA once your high-deductible health plan takes effect. From that point, you have until the tax filing deadline for the year to make contributions to your HSA. So, for example, you have until April 15, 2024 (April 17 for residents of Maine and Massachusetts) to put money in an HSA for the 2023 tax year. This time frame applies to contributions from your employer, too.
If you make contributions to an HSA from Jan. 1 to the tax filing deadline, make sure to notify the HSA bank or administrator if you want it to apply to the previous year’s contribution limit.
Related: When Are Taxes Due?
Excess Contributions to an HSA
What happens if you put too much money in an HSA? If your contributions for the year exceed the HSA contribution limits, the IRS can assess a 6% penalty on the excess amount. The penalty also applies to each tax year the excess contribution remains in your HSA.
In addition, you lose the benefit of income tax-free contributions when you go over the HSA contribution limits. So, you can’t deduct an excess contribution you make to your HSA, and an excess contribution made by your employer must be included in your gross income.
The good news is that there’s a way to avoid the 6% penalty. It won’t apply if you do both of the following:
- Withdraw the excess contributions by the due date of your tax return for the year the contributions were made (including tax filing extensions)
- Withdraw any income earned on the withdrawn contributions and include it as taxable income on your tax return for the year you withdraw the excess contributions and earnings
You can also deduct an excess contribution from a previous year that is still in your HSA. The amount you can deduct is the lesser of:
- The maximum amount you can contribute to an HSA for the year, minus any amounts actually contributed to your HSA by you, your employer, or anyone else for the year
- The total excess contributions in your HSA at the beginning of the year
Related: Best Savings Account Alternatives
Can HSAs Be Used to Save for Retirement?
Since HSA funds can be used for non-health care costs without paying the 20% penalty once you turn 65, many people use an HSA to save for retirement along with a 401(k) plan, traditional IRA, or Roth IRA.
As noted above, you will still have to pay income taxes on your HSA withdrawals under that scenario (much like with a traditional IRA).
Related: Best Rollover IRA Accounts
Where Can I Open an HSA With an Investment Account?
Several HSA providers offer the ability to invest your HSA money. However, the top spot on our list of the best HSA providers goes to Fidelity because they offer the best options for self-directed investors. You can read more about Fidelity’s HSA offerings below.
- Available: Sign up here
- Debit card: Yes
- Insured: Yes (Uninvested cash is insured)
- Minimum balance: $0
- Minimum to invest: $0 for Fidelity HSA, $10 for Fidelity Go HSA
- Investment options: Stocks, bonds, mutual funds, ETFs (investments depend on account type)
Fidelity offers two options for HSA accounts: the Fidelity HSA or the Fidelity Go HSA.
The self-directed Fidelity HSA is best for people who prefer to handle their own investments. With this account, you can invest in stocks, bonds, mutual funds, and exchange-traded funds (ETFs). It’s also a rarity in that it allows you to buy fractional shares of stock. You’ll also benefit from commission-free trades, minimal fees, and no account minimums. This HSA account also comes with a debit card that you can use for qualifying healthcare expenses.
These features make the Fidelity HSA a good option for those seeking the flexibility of a self-directed account, as well as individuals or families who might not have a ton of extra cash to set aside for healthcare expenses.
People seeking a managed account could opt for the Fidelity Go HSA instead. Funds in a Fidelity Go account are invested in Fidelity Flex mutual funds, which feature no management fees and often no fund expenses.