You’ll soon be able to contribute much more money to your health savings account.
Last week, the IRS announced the largest-ever increase in maximum contributions to the popular savings vehicles.
In 2024, the maximum HSA contribution will be $4,150 for an individual and $8,300 for a family, up from $3,850 and $7,750, respectively, in 2023. Add on the extra $1,000 you can put in if you’re over 55, and the maximum contributions are $5,150 for individuals and $10,300 for couples.
That’s a big deal for long-term savers. That’s because, if used to its full potential, an HSA can be a more powerful retirement savings account than more conventional vehicles, such as 401(k)s and individual retirement accounts.
Consider a calculation from Blake Hilgemann, a financial coach and author of the “Pathway to Financial Independence” newsletter: “Every dollar in an HSA is worth at least 17.65% more than a dollar in a 401(k),” he wrote in a recent tweet.
Hilgemann’s arithmetic works because of an HSA’s unique tax advantages. Unlike other types of tax-advantaged retirement accounts, HSA contributions and investment earnings are never taxed, provided you follow the rules when withdrawing from the account.
That means you avoid paying income tax on your withdrawals, which, at current rates, is at least 10%. And because HSA funds aren’t subject to the 7.65% payroll tax employees owe, you come out at least 17.65% ahead when you save in one, says Hilgemann.
That’s especially powerful for people who are, or expect to eventually be, high earners. “If you’re in a high tax bracket, an HSA is a complete cheat code for you,” Hilgemann told CNBC Make It.
Here’s a closer look at why HSAs can be more powerful than other retirement accounts.
The HSA tax advantage
If you invest in a traditional 401(k) or IRA, you get a tax advantage right away: Money you invest in these accounts can be deducted from your taxable income for the year you made the contribution.
In exchange for the upfront tax break, you’ll owe…
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