Daniel Stewart

Why Are There HSA Contribution Limits?

Are you thinking about opening a health savings account? Before you do, it's wise to familiarize yourself with how they work. HSAs are an amazing way to save for unexpected medical expenses. The list of qualifying expenses you can use your HSA on is vast. Putting money into your HSA can help you prepare for the unknown while growing your wealth long-term.

That said, there are HSA contribution limits. In 2023, you can only contribute $3,850 for individual coverage or $7,750 for family coverage. When you consider the rising costs of healthcare, you may wonder why those contributions exist. Read on to find out.

Tax Advantages

The primary reason why HSA contribution limits exist is that these accounts come with many tax advantages. These tax benefits are among the most common reasons people explore HSA options.

Tax-Free Contributions

The first advantage is that all contributions are tax-free. That means you put tax-free dollars into your HSA. That's a major benefit that could lead to abuse. Imagine what people would do if no contribution limits existed. HSAs would be a haven for tax avoidance.

Tax-Free Growth

Another benefit is that the money in an HSA can grow. Like contributions, growth isn't subject to tax. That's something you don't often see with other interest-bearing accounts. You can even explore investment opportunities through your HSA and not pay a penny in taxes on what you earn. The IRS poses the HSA contribution limit to prevent people from using this benefit as a loophole to avoid taxes. Maximize Your Savings with HSA Contribution Limits - Stay Informed on this Website Today!

Tax-Free Distributions

Finally, the third advantage is that distributions for qualifying expenses are also tax-free. When you pull from a traditional IRA or 401(k), everything you take out is taxable income. That's not the case with an HSA.

Of course, there are exceptions. Distributions must only cover qualifying medical expenses like insurance deductibles, prescriptions, medications, etc. If you use your HSA to buy something the IRS doesn't consider a qualifying medical expense, you must pay taxes.

HSAs are one of the most tax-advantaged accounts you can have. As a result, there are many ways to abuse the benefits. The annual HSA contribution limit prevents that abuse, ensuring that HSAs are fair for everyone.

Author Resource:-

Daniel Stewart has been helping people with their money management and personal finance with over 15 years' experience in business finance. You can find his thoughts at HSA investment advice blog.