To Get a Bigger Tax Break on Healthcare, Make This One Move in 2024

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Want to save money for healthcare, reduce your taxes, and get tax-free income in retirement? Here’s how an HSA can help you achieve all three goals. 

If you have a high-deductible health insurance plan (HDHP), you could be eligible for a special way to save money for healthcare costs. It’s called a health savings account (HSA). This account offers a few big benefits to help you save money on taxes in 2024. The health savings account is sometimes referred to by financial experts as offering a “triple tax break,” because it gives you three ways to save money on taxes.

The flexibility and tax advantages of a health savings account make it a great choice for anyone who has the right kind of health insurance situation to qualify. If your employer offers HSA-eligible health insurance plans, you should consider signing up for one at your next open enrollment period. Or if you’re self-employed or a small business owner, an HSA might be the best way to pay for your healthcare costs while reducing your taxable income.

Let’s look at a few reasons why putting money into an HSA could be a smart tax planning move in 2024.

Health savings account (HSA): The triple tax break

Here’s why the HSA is often called a “triple tax break” — it lets you save money on taxes in three different ways:

Your contributions to the HSA give you a tax deduction (up to a certain limit), just like a 401(k) or traditional IRA.You can invest the money in an HSA and let it grow tax free.You can pull money out of the HSA tax free to pay for qualifying types of healthcare expenses, or take money out of the HSA for any purpose after you reach age 65 (but you’ll owe income tax on non-healthcare related withdrawals).

That third tax break is an extra special reason to open a health savings account. If you can go through life without spending all of your HSA money on healthcare, you can use your HSA as an additional tax-deductible retirement savings account. If you use your HSA to save for retirement, you get the benefits of a traditional IRA (tax-deductible contributions).

Why an HSA is better than an HRA

Many employers offer health savings accounts as well as health reimbursement arrangements (HRAs). Sometimes these two types of tax-advantaged healthcare accounts get confused, because the abbreviations are almost the same! But there’s an important difference: With an HSA, you own the account. You can keep your HSA for as long as you want, as long as you have money in it. You can spend as much or as little of your HSA money as you choose, or you can invest the HSA money for retirement.

With an HRA, your employer owns the account, your employer gets the tax deduction, and there’s no special “triple tax break” like you get with an HSA. HRAs can be a good way to pay your out-of-pocket healthcare costs, depending on your overall insurance situation — but you don’t get a tax break on your tax return.

HSAs also tend to be more flexible than an HRA. With an HSA, you get a tax deduction for every dollar you put in (up to a certain limit), and you have full visibility and control over how that money gets spent.

I have personally experienced both HSAs and HRAs over the years with different employers and while being self-employed, and I prefer the HSA! Health savings accounts are just a little more straightforward and easy to understand. You get to keep your HSA even if you leave a job. And if you have extra money in an HSA when you reach age 65, you can spend that money for anything you want, not just healthcare. (But you will owe income tax on those non-healthcare withdrawals.)

How to use your HSA to save money on taxes in 2024

If you’re getting ready to file taxes on April 15, 2024, there are two ways you can reduce your taxes with a health savings account, if you qualify.

1. Put extra money into your HSA for 2023

Just like with a traditional IRA, you’re allowed to make prior year contributions to an HSA until the tax-filing deadline. So if you already had a health savings account in 2023 but didn’t put the maximum amount into it, you can still make tax-deductible contributions, up to the 2023 limits of $3,850 for single people, or $7,750 for families. You have until April 15, 2024 to make these extra contributions, and get a deduction on your 2023 taxes.

2. Max out your HSA for 2024

If you’re just getting started with a health savings account in 2024, you should make a plan to put as much money as possible into your HSA. The 2024 HSA contribution limits are $4,150 for singles, and $8,300 for family coverage. If you’re a married couple in the 22% tax bracket for 2024, maxing out your HSA would save you about $1,826 on your 2024 federal income taxes.

Bottom line: If you have the right kind of high-deductible health insurance plan (HDHP), you can open an HSA. This special tax-advantaged account can help you save money for healthcare, reduce your taxable income, and even get some extra tax-free income in retirement.

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