Financial well-being February 9, 2023 By
Health savings and flexible spending accounts offer two of the best ways to put aside tax-free money for healthcare expenses. As savings account choices that can be paired with health insurance plans, HSA and FSA accounts can save individuals a nice chunk of change by allowing them to save pre-tax money to pay for qualified medical expenses. You save what you would have paid in taxes on the money you put in these accounts.
The IRS limits how much individuals can contribute to these savings accounts, but each year they evaluate the current economy, making adjustments as needed based on inflation. This year the IRS has increased the contribution limits for 2023. Based on surging prices that pushed inflation to record numbers in 2022, a larger-than-usual increase in the contribution limit for 2023 went into effect. This is exciting news as this inflation-adjusted amount will allow you to put more tax-free dollars toward qualified healthcare items.
FUB Tip: Health savings and flexible spending accounts offer two of the best ways to put aside tax-free money for healthcare expenses, but you cannot contribute to both in the same year. If you are eligible for an HSA and FSA, carefully weigh each option. The choice of FSA vs. HSA comes down to your financial situation and your family's health.
Here is what you need to know about this year's IRS HSA and FSA contribution updates:
Higher HSA contribution limits
If you are enrolled in a high-deductible health insurance plan, your plan may be compatible with a health savings account or HSA. An HSA is a tax-advantaged account used to pay for qualified medical expenses, including copays, prescriptions, dental care, contacts and eyeglasses, bandages, X-rays, and more. Contributions to an HSA reduce your taxable income, and the money isn't taxed while in the account, even if it earns interest or investment returns.
This year, HSA contribution limits max out at $3,850 for self-only coverage and $7,750 for family coverage. Savers 55 and over can also take advantage of the additional $1,000 catch-up contribution.
Higher FSA contribution limits
If you're not eligible for a health savings account, it pays to look into a flexible spending account or FSA. A flexible spending account allows an individual to set aside a certain amount of pre-tax money to pay for qualified health or dependent care expenses, including copays, prescriptions, and other out-of-pocket medical expenses.
The difference between HSA and FSA plans is that HSA funds never expire, but FSA funds do. Funds contributed to an FSA are typically only available for a set period (such as one year), and any funds not used by the end of that period generally are forfeited. So you'll need to be careful about the money you contribute to your 2023 FSA to ensure you can spend it all on eligible expenses before the end of the year.
The maximum FSA contribution for 2023 is $3,050.
FUB Tip: First United will partner with you to design and purchase a cost-effective employee benefits program. And we will send you frequent updates and ideas to help you manage this process. Learn more > Employee Benefits | First United Bank
Stay informed.
High inflation has increased the cost of living, meaning that you will need more put away to maintain your standard of living. Understanding the IRS's contributions limits and planning accordingly when contributing to savings and retirement accounts is essential to individuals working to ensure that they maximize their retirement savings and take full advantage of the associated tax benefits.
It is also important to consult with a financial advisor or tax professional to ensure you understand the contribution limits and how they apply to your specific financial goals.
To learn more about these limit increases, visit the IRS's website at www.irs.gov.
For more tips on Faith, Financial Well-Being, Health and Wellness, and Personal Growth contact a local banker or read more First United Bank articles.
