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Healthcare costs can be the wild card of your household budget—given that a serious illness can easily generate tens of thousands in medical bills. One way to manage those costs proactively is by saving to a health savings account or HSA. Build an ample HSA balance and it can keep you financially afloat in those troubled times.

Let’s explore how to create a medical nest egg with a look at HSA contribution limits, tax benefits and the expenses that qualify for tax-free HSA funds.

Understanding HSA Contribution Limits

An HSA is a tax-advantaged investment account designed to defray healthcare costs. As with an IRA or 401(k), there are limits to how much you can contribute to an HSA annually. The limits prevent you from over-using the account to avoid paying taxes.

HSA contribution limits change annually to keep pace with inflation. Inflation reduces the purchasing power of money, and so limit increases are necessary to offset that reduction. This helps to maintain the value of HSA tax benefits over time.

Why Contribution Limits Matter

Contribution limits for any tax-advantaged accounts are important data points for your financial and retirement planning. These accounts defer taxes on capital gains and investment income, which accelerates your wealth production. The more you contribute, the more you benefit.

Reaching the HSA and 401(k) contribution limits within a year, then, should be your goal. Doing so means you are taking full advantage of the tax perks available through these accounts. You will also be making quantifiable progress towards a comfortable retirement.

HSA Contribution Limits For 2024

You are eligible for HSA contributions when you have a high-deductible health plan (HDHP). The type of HDHP you have dictates which contribution limit applies to you. If you have an individual health plan, you are subject to the individual HSA contribution limit. If you have family health coverage, the IRS allows you a higher, family-sized HSA contribution limit. You also get a “catch-up” contribution increase if you are 55 or older.

Note that any contributions your employer makes will count against the limits defined below.

Individual Contribution Limit

The individual HSA contribution limit for 2024 is $4,150. If you get paid every two weeks, that equates to a per-paycheck contribution of about $159—or less if you get employer-funded contributions.

Family Contribution Limit

The family HSA contribution limit for 2024 is $8,300. That equates to about $319 every other week for 26 weeks.

Catch-Up Contributions For Those 55 Or Older

If you are age 55 or older before the end of 2024, you can add $1,000 to the limits noted above. This increase is called a catch-up contribution, as it allows for more savings as you near retirement.

The additional $1,000 brings the total individual contribution for those 55 or older to $5,150. Older savers with family health coverage can contribute up to $9,300 to their HSA in 2024.

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HSA Contribution Limits For 2025

In 2025, HSA contribution limits for individuals and families will be about 3% higher. The catch-up contribution will not change.

Individual Contribution Limit

The individual HSA contribution limit for 2025 is $4,300. This is just over $165 per paycheck if you get paid every two weeks or $179 per check if you get paid twice monthly. Again, those numbers assume you are not receiving employer-funded HSA contributions.

Family Contribution Limit

The family HSA contribution limit for 2025 is $8,550. If you spread that out over 26 paychecks throughout the year, you would contribute $320 in each pay period. The per-check amount is about $356 if you get paid twice monthly or 24 times annually.

Catch-Up Contributions For Those 55 Or Older

The catch-up contribution for those 55 or older remains at $1,000 in 2025. This brings the total allowed contributions for older savers to $5,300 for individual coverage and $9,550 for family coverage.

How Inflation Impacts These Limits

Unless the U.S. economy enters a deflationary cycle, you can expect HSA contribution limits to rise again in 2026. As noted, the annual increases are designed to retain the value of HSA tax advantages even as the purchasing power of the U.S. dollar declines.

Historically, inflation is normally 2% to 3% annually. Recent years have deviated from that pattern, but that high inflation cycle is hopefully winding down as 2024 ends.

Tax Benefits Of HSA Contributions

HSAs are the only investment account type that offers a triple tax benefit.

  1. Contributions are pretax. HSA contributions reduce the income taxes you pay. In practice, this means you can raise your contribution by, say, $50, and your net pay will decrease by less than $50.
  2. Withdrawals for eligible medical expenses are tax-free. You can withdraw HSA funds tax-free at any time, if you use the proceeds for eligible medical expenses. Use the funds for a different purpose, and you pay income tax on the amount plus a 20% penalty. The 20% penalty drops away when you turn 65, however. Thereafter, you can withdraw funds for non-eligible expenses and pay income tax only.
  3. Investment earnings are tax-free. Gains, dividends and interest earned within an HSA incur no annual taxes.

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Eligible Expenses For HSA Funds

To qualify for tax-free HSA withdrawals, you must spend the funds on eligible expenses. These include costs related to the diagnosis, treatment or prevention of disease, illness or physical or mental disability, including:

  1. Services rendered by physicians, dentists, psychiatrists and other medical practitioners.
  2. Prescription medication.
  3. Over-the-counter medication such as Advil and hydrocortisone cream.
  4. Equipment costs, including eyeglasses, hearing aids and glucose monitors.
  5. Medical supplies, such as kinesiology tape and topical iodine.
  6. Diagnostic devices.
  7. Health trackers such as the Oura ring.
  8. Travel costs associated with necessary medical care, including hotel expenses.
  9. Long-term care coverage premiums.
  10. Medicare premiums after you are 65.
  11. Healthcare coverage premiums only when you are unemployed or continuing coverage under Cobra. Cobra is an extension of coverage available after you lose access to your health plan, usually due to a job change.

Items that are not eligible for tax-free HSA withdrawals include:

  1. Health insurance premiums if you are employed and under 65.
  2. Expenses incurred before your HSA is established.
  3. Many homeopathic remedies, such as rose hips and turmeric.
  4. Plastic surgery.
  5. Basic personal care products such as toilet paper and toothpaste.

How To Maximize Your HSA Contributions

There are different ways to use your HSA. One strategy is to use HSA funds to pay your current healthcare costs with tax-free dollars. You will save this way, but you will see limited benefit from the account’s tax-free investing perk.

When you take a long-term view of these funds, on the other hand, you maximize the value of your HSA’s tax advantages. You will also accumulate a larger balance of funds for retirement. Three strategies can position you for long-term wealth creation within your HSA:

  1. Contribute the annual maximum or as close to it as you can.
  2. Invest the funds for higher growth potential.
  3. Whenever possible, pay out of pocket for current health care expenses rather than taking HSA withdrawals.

Know that you can roll over the full balance in your HSA annually, for as long as you have the account. Also, once you turn 65, you can withdraw HSA funds for any purpose without penalty. You still pay income tax on the withdrawals, as you would for traditional IRA and 401(k) withdrawals. In this way, the HSA also serves as a backup retirement fund.

Bottom Line

The HSA has powerful tax advantages that benefit you now and later. Reap the rewards of those advantages by maximizing your contributions and investing your balance for long-term growth.

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