Americans can now put a lot more in health savings accounts. Here’s how much they can invest.

People who have health savings accounts are getting a big opportunity next year — a shot to contribute much more to these tax-advantaged savings accounts.

It’s a win for families trying to defray medical expenses as inflation rates slowly come off their pricey perch, observers say. It’s also a win for people who can afford to turn the accounts into a long-term wealth building vehicle.

Health savings accounts are used to offset the pain of high-deductible health-care plans. With high-deductible plans, customers pay a lower premium, but they pay more for their medical services. With HSAs, pretax dollars are used to pay out-of-pocket health-care expenses. Money deposited in HSAs can roll over from year to year, and may be invested in a wide range of mutual funds. Many people, however, do not have access to these accounts through their health-insurance plan.

For 2024, a person can contribute up to $4,150 in an HSA, up from $3,850 this year, the IRS said this week. The contributions for a family account have risen to $8,300 next year, up from $7,750 in 2023, the tax agency said. The maximum catch-up contributions for people 55 and above stays at $1,000. So a couple above the age of 55 can sock away $10,300 next year.

For 2024, a high deductible plan, among other things, has to have a deductible that’s at least $1,600 for individual coverage and $3,200 for family coverage, the IRS said.

These accounts get three types of tax breaks: there’s a tax deduction for money that goes in, tax-free growth and then tax-free distributions for qualified medical expenses on the way out. That even counts for medical expenses they incurred years ago, so long as they have the receipts.

The annual increases usually ranged around 1% to 3%, according to the Employment Benefit Research Institute’s compilation of contribution limits through the years.

The 2024 contribution increases are the steepest year-over-year increases since people could start putting money into these accounts beginning in 2004. The 2023 contribution limits for individuals grew more than 5% from the prior year, and they grew more than 6% for families. Meanwhile, the 2024 contribution limits for individuals and families will increase more than 7% from their maximums this year.

Like certain other parts of the tax code — including the standard deduction and income tax brackets — the tax rules surrounding health savings accounts are indexed with inflation rates, said Jake Spiegel, research associate, health and wealth research at the Employment Benefit Research Institute, a nonprofit organization based in Washington, D.C.

“Inflation is hitting us all,” but higher HSA contribution limits could let people “stretch their health-care dollars a little,” Spiegel said. “The upshot here is that you are able to save more than you otherwise could.”

Despite their many advantages, many people don’t have HSAs. Only one quarter of workers within an HSA-eligible plan were enrolled in the accounts, according to a 2022 employer health benefit survey from KFF, an organization focused on public health.

Just over one-third of workers, 35%, had access to these accounts last year, according to the Bureau of Labor Statistics — even though access to the accounts didn’t necessarily mean these workers actually used the accounts.

These accounts are different than flexible spending accounts (FSAs), which also let people put aside money to defray costs. For starters, FSAs account holders cannot invest the money and if the employer allows FSA money to roll over from one year to the next, the carryover amount is capped at $610 in 2023.

Even when people are enrolled in HSAs, many aren’t using it as much as they could, Spiegel said. The average account balance was just over $4,300 at the end of 2021 and individuals contributed an average $1,880 that year, according to EBRI’s research of a database with more than 13 million accounts.

Very few account holders use the money sitting in their HSA for investments, Spiegel said. Within the database, 12% of the accounts were invested in assets other than cash, he noted.

Of course, there may be good reasons why most people keep their HSA money away from the stock market. “If you don’t have the cash flow to pay out of pocket, you might not want to subject your HSA to market risk,” he said.

But the preferential tax treatment is a powerful reason to use HSAs to grow a portfolio, financial experts said. That puts extra significance on the new contribution limits, they add.

“Especially in a high-inflation environment where there is an increasing cost of living, it is helpful to have the opportunity to put more into the HSA and take advantage of the tax-efficient investment opportunity to accumulate growth,” said Kristy Jiayi Xu, founder of Global Wealth Harbor.

The HSA is “a really great planning tool for a high-income earner who doesn’t have the ability to make Roth [IRA] contributions,” said Nicole Webb, senior vice president and financial advisor at Wealth Enhancement Group.

Traditional IRAs are funded with before-tax money, and are taxed upon withdrawal. Roth IRAs are funded with after-tax money and withdrawals are made tax-free.

Tax rules allow people to deduct contributions to traditional IRAs so long as they meet certain conditions, pegged to issues like coverage through a workplace retirement plan and annual income. Above phase-out ranges, deductions don’t apply if a person or their spouse has a retirement plan through work.

For individuals, the phase out ends at an annual income of $153,000 in 2023 and for married couples, it’s $228,000.

If income limits block Roth contributions, HSAs become a destination to grow a portfolio with preferential tax treatment, Webb said. For an affluent, two-income household the Roth IRA phase-out could come faster than they think, Webb noted. When Webb talks to clients about their portfolio potential and tax planning with HSAs, “they don’t generally know, and are surprised to learn them.”