How to use an HSA to make your medical expenes tax free.
A Health Savings Account, often called an HSA, allows you to pay for some medical expenses with tax-free money. Unfortunately, there are limits to how much you can contribute each year and how you can spend the money saved in your HSA. However, if you are eligible for an HSA, there is good news: The contribution limits are increasing for 2025. If appropriately used, a health savings account could be one of the most valuable retirement accounts.
The IRS announced a nice increase to the maximum Health Savings Account contribution limits for 2025. The new 2025 HSA contribution limit is $4,300 if you are single. The 2025 HSA contribution limit for families is $8,550.
HSA users aged 55 and older can contribute an extra $1,000 to your HSAs. This amount will remain unchanged in 2025.
What Are The 2024 HSA Contribution Limits?
The Health Savings Account contribution limits for 2024 are $4,150 for individuals and $8,300 for families. Those 55 and older can contribute an additional $1,000 as a catch-up contribution.
You generally have until the tax filing deadline to contribute to an HSA. This means that for the 2024 tax year, you can make contributions up until April 15, 2025.
What Are The New 2025 HSA Contribution Limits?
Health Savings Account (HSA) contribution limits have increased again for 2025. The HSA contribution limits for 2025 are $4,300 for individuals and $8,550 for families. Those 55 and older can contribute an additional $1,000 as a catch-up contribution.
Are You Eligible To Use A Health Savings Account?
For 2025, a high-deductible health plan (HDHP) must have a deductible of at least $1,650 for individual coverage or $3,300 for family coverage. Annual out-of-pocket expense maximums (deductibles, co-payments and other amounts, but not premiums) cannot exceed $8,300 for single coverage in 2025 or $16,600 for family coverage.
HSA Contribution Limits Without A High Deductible Health Plan
Your contributions may be limited if you are not enrolled in and utilizing an HSA-eligible health insurance plan for the entire year. However, if you are still explicitly covered on December 1 of a given year, you should be able to contribute the maximum amount to an HSA for that year.
If an HSA-eligible health insurance plan didn’t cover you for the entire year, you could determine your prorated contribution amount by counting the number of months you were enrolled in an HDHP on the first of a month and dividing it by 12. You would then multiply the number by the total amount you could contribute if you were eligible for the whole year.
HSA Contribution Limits When You Are Enrolled In An HDHP On December 1
If you are enrolled in an HDHP health plan on December 1 of a given year, you can contribute the maximum amount you’re eligible for, per the IRS’ “last-month rule.” This is true whether you’ve been enrolled in an HSA-eligible health plan for 1 day or 365 days. The last-month rule has one big caveat that you must follow.
You will need to stay enrolled in an HDHP for a one-year “testing period” running from December 1 of the year you contribute to December 31 of the following year. If you are no longer enrolled in an HSA-eligible HDHP during that year, you must pay income taxes and a 10% penalty on any excess contributions you may have made when you file your tax return.
Should You Contribute The Maximum Amount To An HSA Now?
There are many reasons to contribute the maximum to a health savings account each year. Here are the three most common reasons to maximize your HSA contribution in a given year.
1. You Expect Large Medical Bills During The Year
If you are expecting a large amount of medical expenses during a given year, why not max out your HSA and be able to pay for at least part of those expenses with pre-tax money? Healthcare is expensive, but if you can get a tax deduction, taking care of your health becomes a little less painful (at least financially).
2. You Want The Deduction Via HSA Contributions
You won’t owe income taxes on the money you contribute yearly to an HSA. If you want to reduce your taxes each year, maxing out your HSA can be a nice part of a tax-minimization strategy. Let’s be real: who doesn’t like a nice tax deduction?
3. You Want More Tax-Free Income In Retirement
If you have already maxed out your 401(k), treating your HSA as an additional retirement account could be wise. You could invest your funds and grow quite a nice pool of money that could be withdrawn tax-free to fund medical expenses in retirement. You could also stockpile receipts and reimburse yourself for all your medical spending while you have built up the HSA account balance.
Will Employer Contributions Affect HSA Limits?
Your employer may contribute to your health savings account if you are lucky. Your employer may contribute a set amount per employee or may make matching contributions of some kind. The IRS sets total annual limits on the amounts that may be contributed to an HSA. If an HSA is funded by employer and employee contributions, the total contribution limits for the year are the same. Simply put, your employer contributions will reduce the amount you, the employee, can contribute. Any extra money from your employer is a good thing.
Contributions made by an employer to the health savings account for eligible employees are excludable from the employee’s income and not subject to federal income tax, Social Security tax, or Medicare tax. In case you were wondering, employer contributions are deductible as a business expense to the company.