A health savings account (HSA) helps you cover medical expenses and provides distinct tax breaks. But each year, the IRS sets limits on how much you can contribute.
For 2024, the HSA contribution limits saw a significant increase from 2023. And it’ll grow again in 2025.
What are the HSA contribution limits?
The HSA contribution limit for 2024 is $4,150 for individual coverage and $8,300 for family coverage. However, those aged 55 and older can make additional catch-up contributions of $1,000.
And in 2025, HSA contribution limits will be $4,300 for individual coverage or $8,550 for family coverage.
But keep in mind that HSA contribution limits for any given tax year apply to combined contributions by you and your employer if applicable. For instance, if you have individual coverage and your employer contributes $2,000 in 2024, you can only contribute $2,150. If you’re 55 or older, that’s $3,150 because of the catch-up contribution.
And make sure you’re aware of these limits, because over-contributing to HSAs could trigger tax consequences.
What if I contribute too much to an HSA?
Contributing more than the IRS applicable HSA limits for any given year would be considered an excess contribution or an excess accumulation.
The IRS levies a 6% excise tax on any excess accumulation in your HSA each year until you withdraw the excess contribution from your account. The excess contribution would also be taxed as ordinary income.
To correct an excess accumulation, you need to withdraw the excess amount from your HSA as well as any earnings associated with it by the applicable tax-filing deadline. If you do so, you may be able to bypass income excise tax for that year.
You also need to report this distribution on your tax return for the year the excess contribution was made. In addition, you’d need to fill out and include Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts to calculate and report excise tax.
Your HSA provider can guide you through the process of reporting and correcting excess contributions.
How does an HSA work?
An HSA helps you save for qualified health expenses, and offers some appealing tax advantages. Your HSA contributions are tax deductible and money in an HSA grows tax-free. Withdrawals from HSAs are also tax-free as long as they cover qualified health expenses.
These expenses generally include doctor visits, medications, and medical equipment, as well as dental and vision procedures. You can find the full details on IRS Publication 969.
But be careful what you use your HSA money on. Withdrawing money for anything other than a qualified medical expense before reaching age 65 would trigger a 20% penalty plus ordinary income taxes on the withdrawal.
But after reaching age 65, you can withdraw HSA funds to cover anything penalty-free. However, you’d still owe ordinary income tax on withdrawals for non-qualified health expenses.
HSA eligibility
In order to qualify for an HSA, you need to be covered by an HSA-eligible high-deductible health plan (HDHP). And for 2024, that HDHP’s minimum deductible is $1,600 for individual coverage and $3,200 for family coverage. Additionally, you can’t be covered by any other health plan unless it’s specifically allowed by your provider.
Your employer may offer an HSA as part of its benefits offerings. But you can also open an HSA through various financial institutions including major brokerages such as Fidelity and Schwab.
Financial institutions may allow you to use your HSA similarly to an individual retirement account (IRA).
Many brokerages allow you to invest your HSA dollars in a variety of securities like the following.
- Stocks
- Mutual funds
- Exchange-traded funds (ETFs)
Using an HSA as an investment account
Many financial advisors recommend you keep a sizable amount of your HSA dollars in liquid and generally safer investments like cash and money-market funds to cover unexpected qualified healthcare expenses and deductibles. But once you have a sizable liquid portion, you can consider investing in growth-focused securities like ETFs and mutual funds.
This could allow you to accumulate money for medical expenses down the road, which could get higher as you near retirement.
The latest Fidelity Retiree Health Care Cost Estimate found that an average retired couple aged 65 in 2023 was expected to need about $315,000 saved to cover health care expenses in retirement. And an average individual would have needed $157,500 saved after-tax.
Why does this matter?
Understanding HSA contribution limits for any given year is crucial to make sure you’re getting the most out of your HSA and avoiding penalties imposed by the IRS. HSAs can be very effective tax-advantaged tools that can help you save for future medical expenses. But it’s important to know key facts about HSAs. So we created this guide to help you better understand HSAs as well as contribution rules.
If you want to learn more about HSAs, check out our regularly-updated HSA main page for the latest coverage.
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