When considering how to invest money, many people opt for a health savings account (HSA). An HSA is a savings account meant for growing an emergency fund in case of future medical expenses. Any contribution made to an HSA is tax-deductible, whereas any interest or earnings from your HSA isn’t taxed at all.
Also, you won’t be taxed if you make a withdrawal from your HSA for a qualified medical expense, which could include medical supplies, medical services, and even Medicare premiums. The catch is that you can contribute to an HSA only if your health insurance is a high-deductible health plan (HDHP). And HSAs also have annual contribution limits that dictate the amount of funds you can add to the account.
In this guide, we’ll go over the HSA maximum contributions for tax years 2022 and 2023 and what that means for you. We’ll also explain how HSA catch-up contributions work and go over a few other details you should keep in mind. All of this information will be especially important when it comes to future tax planning and your plan for saving for retirement.
HSA contribution limits for 2022 and 2023
HSA contribution limits can change from year to year. The Internal Revenue Service (IRS) adjusts these limits for inflation and then rounds to the nearest $50. As a result, you’ll typically see the contribution limits rise slightly each year. Also, keep in mind that there are two separate contribution limits depending on your HDHP coverage: one for individuals and one for families.
Here are the HSA maximum contributions and catch-up contributions for the tax years 2022 and 2023:
|Tax year 2022||Tax year 2023|
|Catch-up contribution (age 55 or older)
The contribution limits for 2023 have increased a little compared to 2022. The additional catch-up contribution allowed for individuals aged 55 or older has stayed the same.
Do note that employer contributions to your HSA are included in the HSA maximum contribution limits for the year. Many employers offer HSA accounts as part of a health insurance plan in their benefits package and will regularly contribute to them throughout the year. When you calculate how much you can contribute to your HSA over the course of the calendar year, you’ll have to deduct any amount your employer has already contributed from the annual limit.
For example, if your employer contributes $100 each month to your HSA, that would net $1,200 ($100 x 12 = $1,200) of employer contributions over the year. This would leave you with a remaining possible contribution amount of $2,450 ($3,650 - $1,200 = $2,450) for individuals or $6,100 ($7,300 - $1,200 = $6,100) for families for tax year 2022.
Because you can’t contribute to an HSA without having an HDHP, it’s essential that you keep an eye on the HDHP minimum deductibles. There’s a minimum deductible set for HDHPs each year that determines whether the HDHP is HSA-eligible. This amount can change from year to year as with HSA contribution limits.
For 2022, the minimum deductible for a plan to qualify is $1,400 for individuals and $2,800 for families. In 2023, an HDHP must have a deductible of at least $1,500 for individual health insurance plans or $3,000 for family health insurance plans.
HSA catch-up contributions
Catch-up contributions are designed to help individuals getting close to retirement boost their HSA funds. Catch-up contribution amounts are not adjusted for inflation and will change only if the laws concerning them are changed.
Catch-up contribution eligibility applies to any individual HSA account holders who will be 55 years or older by the end of the year. The HSA catch-up contribution amount for 2022 and 2023 is $1,000 per individual. So if you’re 54 years old right now and will turn 55 before the end of the year, you can contribute an additional $1,000 to your eligible HSA on top of the normal contribution limits. This also applies if you’re already 55 or older.
Other things to keep in mind
Everyone’s circumstances are different when it comes to making financial decisions, but here are a few things to keep in mind as you navigate the world of HSAs:
- Married couples and HSA scenarios: HSAs are for individuals, which means there’s no such thing as a joint HSA. If each spouse has their own individual coverage under an HDHP, they may each qualify for their own HSA. Then they would follow the individual contribution limits as they contribute to their HSAs. If either spouse qualifies for family coverage with an HDHP, both spouses would have to follow the family HSA contribution limits.
- Transfer IRA to an HSA: If you’re eligible to contribute to an HSA, you can also move funds from an IRA into your HSA. This can be helpful if you want to hit your HSA contribution limits but need more funding. You must still follow the applicable contribution limits for the year when using an IRA to fund an HSA. This movement of funds, called a rollover, is tax-free as long as you remain eligible for an HSA for 12 months after the transfer is completed. You can only do one IRA rollover into an HSA per lifetime.
- HSA state taxes: HSA contributions, earnings, and dividends may have different tax benefits depending on what state you live in. For instance, if you live in a state with no income tax you may not receive a state tax deduction for contributing to an HSA. That said, HSA contributions are generally treated as non-itemized tax deductions for most people and can reduce your taxable income. Be sure to speak with a tax professional or financial advisor about HSA contributions if you have questions about their potential for creating tax savings.
How much can you contribute to an HSA in 2022?
Individuals with self-only coverage can contribute up to $3,650 in 2022, and those with family coverage can contribute up to $7,300, according to IRS Revenue Procedure 2020-32, which offers adjusted limits on HSAs.
How much can you contribute to an HSA in 2023?
Individuals with self-only coverage can contribute up to $3,850 in 2023, and those with family coverage can contribute up to $7,750, according to the IRS.
Should you max out your HSA contribution?
Whether you should max out your HSA contributions depends on your other financial goals. One of the advantages to maxing out your HSA is you can take a distribution at any time without penalty, as long as it is for a qualified medical expense, including copayments.
As a result, you can reap health benefits while offsetting your overall costs. Carefully consider your other financial goals, including retirement and paying down debt, as you decide whether to max out your HSA contribution.
What happens if you exceed your HSA contribution limit?
If you exceed the contribution limit, you are usually required to pay a 6% excise tax on the extra amount. However, if you withdraw the extra amount before the due date for your tax return, you can avoid the excise tax.
How is an HSA different from an FSA?
Both the HSA and flexible spending account (FSA) can be employee benefits that are funded with pre-tax dollars.
One of the biggest differences between the accounts is that your HSA funds roll over year-to-year, whereas you could lose the money in your FSA if you don’t use it by the end of the year. Additionally, you can typically invest a portion of your HSA, and you could use your HSA as a backup retirement fund down the road.
However, you must meet certain requirements for a high-deductible health plan to qualify for an HSA, and that requirement isn’t present for the FSA.
How is an HSA different from an HRA?
The main difference between a health reimbursement arrangement (HRA) and an HSA is the fact that the HRA is owned by the employer, and the HSA is owned by the employee. With an HRA, the money is provided by the employer, and the employee is reimbursed for out-of-pocket expenses up to a set amount.
With an HSA, the employee makes contributions (though the employer can contribute as well), and the money stays with the employee if they change jobs or quit.
An HSA can be a fantastic option for saving and investing money because of its tax advantages. It may not be labeled as a retirement account, like a 401(k), but making an HSA investment functions largely the same: You’re putting tax-deductible money away for a time when you might need it in the future to cover out-of-pocket expenses related to your health care costs. As such, an HSA can greatly contribute to saving for retirement.
Just remember to be aware of annual HSA limits when it comes to contributions so you can avoid costly retirement mistakes and be more prepared for retirement planning and tax planning.
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