A health savings account (HSA) is a savings tool many use for health qualifying care expenses. It's a tax-advantaged way to save for future health care costs, and you can use it in retirement. You can contribute money up to the annual limits tax-free each year. Then, when you need to use the funds to help pay for qualified medical expenses, you can withdraw them tax-free.
Each year, the Internal Revenue Service (IRS) announces HSA contribution limits. The 2023 HSA contribution limits increased from 2022 for both individuals and families. However, not everyone can use an HSA. There are some caveats that depend on the type of health insurance plan you're enrolled in; not all plans qualify. So, here is what you need to know about HSAs for 2023.
What Is an HSA?
Health savings accounts help people save money to pay for qualifying health care expenses. If you're in an approved plan, you can make contributions up to a limit set by the IRS and then withdraw funds tax-free when you need them to pay for IRS-approved medical costs. Any contributions you make to your HSA while enrolled in a qualifying plan will roll over each year. So even if you have a year when you don't make any contributions, you can still withdraw funds for medical expenses.
An HSA has triple tax savings:
- The money you contribute to an HSA reduces your taxable income.
- Any earnings you get from your contributions can grow tax-free.
- You can withdraw those funds tax-free to spend on qualifying medical expenses.
HSAs are available to individuals and families enrolled in qualifying high deductible health plans (HDHPs). HDHPs typically have lower monthly premiums but higher deductibles. As a result, you may need to pay for your medical expenses out-of-pocket until you meet your deductible. By contributing to an HSA, you're creating a pool of funds you can use to pay for some of these out-of-pocket medical expenses.
There are a few limitations to HSAs to be aware of beyond those mentioned:
- You can't contribute if you're enrolled in Medicare.
- You can't contribute if you're covered by another insurance plan, such as your spouse's coverage.
- If you're enrolled in your own HSA plan, you can't be claimed as a dependent on someone else's federal taxes.
What Are the IRS HSA Contribution Limits?
The IRS sets two limits for HSA contributions: one for people on individual plans and another for those on family plans. For 2023, HSA contribution limits for a person on an individual plan is $3,850, and it's $7,750 for individuals on family plans.
The IRS also defines what counts as an HDHP plan. In 2023, an HDHP plan has an annual deductible of at least $1,500 for individuals and $3,000 for family coverage. In addition, the yearly out-of-pocket expenses (not including premiums) must not exceed $7,500 for individuals and $15,000 for families.
Plans change and adjust based on inflation. As a result, the contribution maximums increased by only $50 and $100 each for individuals and families, respectively, each year from 2019 to 2022. For example, in 2022, the HSA contribution limits were $3,650 for individuals and $7,300 for families.
Since inflation has been much higher during 2022, the IRS increased contribution limits to reflect that. As a result, those enrolled in HDHP plans in 2023 can contribute $200 more for individuals and $450 more for family plans than they could in 2022.
Do HSAs Have Catch-Up Contributions?
If you're over 55, the IRS allows you to contribute extra money to your HSA every year, as long as you are still enrolled in a qualifying HDHP. Unlike standard maximum contributions, these don't often change on a yearly basis. For example, the catch-up contribution limit of $1,000 for 2023 is the same as in 2022.
So, if you are 57 in 2023, to figure out your maximum HSA contributions, all you need to do is add $1,000 to your plan limit. If you're enrolled in an individual plan, your maximum contribution limit is $4,850; if you're enrolled in a family plan, it's $8,750.
For those over 55, it's important to remember that you can take advantage of catch-up contributions until you enroll in Medicare. There are no Medicare plans that qualify as HDHPs. However, if you've contributed to an HSA while enrolled in an HDHP plan before you enrolled in Medicare, you can withdraw funds tax-free to pay for qualifying health care costs, including Medicare Parts A, B, and D premiums.
What Medical Expenses Qualify for HSA Plans?
The IRS allows you to withdraw funds tax-free to pay for qualifying medical expenses. If you are under 65 and use the funds to pay for something that doesn't qualify, you can expect to pay taxes at your income level on those expenses, plus a penalty. However, if you're over 65, you will have to pay taxes at your income level, but you won't get hit with any additional penalties.
Here are some IRS-approved medical expenses you can pay for from your HSA:
- Ambulance and hospital services
- Improvements made to your home to help accommodate disabilities, such as ramps, widening doorways and safety railings
- Chiropractor visits
- Dental treatments
- Eye exams, contact lenses and glasses
- Hearing aids
- Certain insurance premiums
- Medicare Parts A, B and D premiums
- Qualifying long-term and nursing care
- Smoking and alcohol programs
- Transportation to and from medical care
In most cases, you can use HSAs to pay for qualifying medical expenses for yourself and those in your family, such as your spouse or children, as long as limitation rules don't disqualify them.
How HSAs Can Help Play a Role in Retirement
You may be able to get an HSA through your employer if they offer HDHPs. However, if they don't, or you get coverage through the Affordable Care Act (or state) marketplace, you can open your own HSA through any IRS-approved bank, insurance company or brokerage firm. If you're unsure how to, your financial advisor can help you set one up.
Once you begin contributing to your HSA, you can, in essence, treat it much like any other individual retirement account (IRA) you have. Any contributions will grow tax-free over time, and you can withdraw those funds tax and penalty-free as long as you use them to cover qualifying medical expenses.
Health care costs continue to rise, and most Medicare plans only cover approximately 80%. So, having access to an HSA can help you refrain from needing to withdraw from your IRAs or other retirement accounts if you need to cover large or unexpected expenses. If you qualify for an HSA, discuss it with your advisor. You may find it's another tool you can use to help manage your health care costs in retirement.