What Are the HSA Contribution Limits for 2023?

Health savings accounts (HSAs) have grown in popularity over the last decade. Over 60 million people were covered by an HSA as of December 31, 2020, according to Devenir.

HSAs offer many attractive benefits, including the ability to spend your dollars on qualified medical expenses without worrying about taxes. Although these benefits can help you save money on healthcare costs, your contributions are capped at a certain dollar amount every year.

The contribution limits for health savings accounts (HSAs) will be higher for 2023. The higher limits will allow individuals and families to save more money on qualified medical expenses. If you qualify to make contributions for 2023, we will break down how contributions work and what you should consider.

How do HSAs work?

If you are enrolled in a qualified high-deductible health plan (HDHP), you can make contributions to an HSA. You can sign up for an HSA at work if your employer offers it. You can also open your own HSA at a financial institution.

An HSA is a special account that allows you to pay for qualified medical, dental, and vision expenses not covered by your insurance. The benefits are also available for your spouse and any eligible dependents you may have.

Your contributions to the account are tax-free, and your earnings grow tax-free. You won’t owe any taxes on the money in the account if funds are used to pay for IRS-approved medical expenses.

Here are some IRS-approved purchases you can make with your HSA to qualify for the tax-free benefits:

• Allergy medications

• Birth control pills

• Blood pressure monitor

• Breast pumps

• Cold and cough medicine

• Condoms

• Insulin

• Masks

• Menstrual cups

• Pads

• Period panties

• Pregnancy tests

• Prescription sunglasses

• Sleep aids

• Tampons

What are the HSA contribution limits for 2023?

You can contribute money to your HSA for every month you qualify. The IRS released the increased contribution limits for 2023, allowing HSA holders to save more money on qualified healthcare expenses.

The below table shows the increased contribution limits for 2023:

If you are 55 years of age or over, you are allowed to contribute extra money to your HSA. In 2023, you can contribute $4,850 for self-only coverage and $8,750 for family coverage. You can take advantage of this $1,000 catch-up contribution until you enroll in Medicare.

How have HSA contribution limits changed since 2022?

The annual HSA contribution limits typically increase by $50 for individual coverage and $100 for family coverage. However, rising inflation led to a higher increase from 2022 to 2023. The contribution limits for 2023 have climbed by $200 for individual coverage and $450 for family HSAs.

The below table shows the maximum HSA contribution limits for 2022:

Here’s a table that shows the increase in HSA contributions for tax years 2019 through 2023:

Should you consider a high-deductible health plan in 2023?

If you want to contribute money to an HSA, you must be enrolled in a qualified high-deductible health plan (HDHP). Before you sign up for an HDHP, you want to make sure it’s the best health insurance plan for you and your family.

Here’s how an HDHP works:

• The monthly premiums are typically lower than traditional insurance plans.

• You’ll have to pay a high deductible. This means you’ll need to have money available to pay for medical expenses before your health insurance starts to pay.

• You may have to pay a copay or coinsurance after you reach your deductible. 

Before signing up for an HDHP, you should consider the following questions:

• Are you healthy with no existing medical conditions?

• Can you afford to pay the high deductible if you have an emergency medical need?

• Are you planning to have a baby soon?

• Do you go to the doctor often?

• Do you require ongoing treatment due to a chronic condition?

• Do you have several prescription medications?

These are good questions to determine which health insurance plan is best for you. Although many people typically choose an HDHP when they are healthy, these types of insurance plans can work well for people in other situations, too. It’s important to review your family history, lifestyle, financial situation, and medical needs to determine if an HDHP is a wise option for you.  

How do HSA contributions affect your taxes?

HSAs are known for their triple-tax advantage. Here’s how the taxes work:

• Every dollar you contribute to the account is tax deductible.

• Your earnings you receive from investments grow tax-free.

• You can withdraw money tax-free if you spend the funds on qualified medical expenses.

For example: Let’s say you have individual HSA coverage and earn $80,000 in taxable income for the year. If you contribute the maximum amount to your HSA ($3,850 in 2023), your taxable income will drop to $76,150.

Every dollar that you contribute to an HSA reduces your taxable income. If you invest your HSA dollars, you can potentially have more money available to cover qualified medical expenses. As long as you spend your money on qualified medical expenses, you won’t have to pay taxes on the funds.

Can you overfund your HSA?

Yes, but there may be consequences. It’s important to review the maximum HSA contribution every year to avoid contributing too much. If your contribution exceeds your allowable limit, you will have to pay an excess-contribution penalty. This means you’ll have to pay a 6% excise tax each year that the money remains in your account. This is on top of the regular income tax you’ll have to pay on the money.

You can avoid excess HSA contribution penalties by withdrawing the excess funds before filing your taxes. If you overfund your account, talk to your HSA custodian immediately. They may be able to help correct the error before you file your tax return.

If you did not qualify to make HSA contributions the entire year, you may qualify for the last-month rule. This would allow you to contribute the maximum amount to an HSA even if you were not qualified to do so during all months of the year.

How can you make the most of your HSA?

The HSA can be a powerful savings account if you use it to its full potential.

Here are a few ways to maximize your HSA:

• Contribute as much as possible while you qualify.

• Invest your funds in assets that allow your money to grow.

• Avoid spending your money on nonqualified expenses if you are under 65.