Buzz
If you have a health insurance plan that includes a Health Savings Account (HSA) or are considering signing up for one during the next Open Enrollment period, there’s good news: The IRS has announced an increase in the amount you can contribute to your HSA for 2021.
This may not be shocking news, as the IRS typically raises HSA contribution limits annually. However, for those who aim to maximize their HSA contributions—whether to take advantage of the tax benefits, save and invest for future medical expenses, or because funds remaining in your HSA after age 65 can be used for retirement—here’s what you should know:
The contribution limit for individual plans will rise from $3,550 in 2020 to $3,600 in 2021.
The contribution limit for family plans will increase from $7,100 in 2020 to $7,200 in 2021.
I understand that adding an extra $50 or $100 to your HSA in 2021 might not seem like much, but let me quickly remind you of the many other benefits of having a health savings account:
A healthcare emergency fund
A health savings account allows you to set aside funds for unexpected medical costs, whether it's an emergency room visit or the purchase of a blood pressure cuff to use during your next telemedicine session.
(The blood pressure cuff example was mine, by the way—and my HSA reimbursed the $42.75 almost instantly.)
Consider your HSA as an extension of your emergency savings, or simply as a way to set aside money for whatever medical expenses might come your way.
Tax-free savings
You can contribute pre-tax income to your HSA—and even better, you won’t owe taxes on any money you withdraw from your HSA, as long as it’s spent on qualified medical expenses (or used to reimburse yourself for those expenses).
HSAs are among the few savings accounts that offer a truly tax-free benefit.
A potential retirement fund
You can invest the funds in your HSA much like you would with an IRA or 401(k)—and if there’s still money in your HSA once you reach 65, you can treat those funds as part of your retirement savings.
Once you turn 65, the rules for your HSA change; essentially, it functions like a traditional IRA. You can take money out for any reason without facing penalties, though you’ll have to pay income tax on those withdrawals. However, if the money is used for qualified medical expenses, your withdrawals remain tax-free.
Some people take advantage of this rule change by contributing the maximum amount to their HSA each year, without ever making withdrawals. They pay for medical expenses out-of-pocket, saving the HSA for healthcare costs after retirement. If your income allows you to fully contribute to your HSA each year while covering your medical expenses separately, an HSA can be a great tool for retirement savings.
One major drawback of an HSA is that you can only open one if you enroll in a high deductible health plan (HDHP). If you're hoping to save on healthcare costs with a plan that has a lower deductible, you won’t be able to take advantage of an HSA. For many, though, the benefits of an HSA outweigh the drawbacks of a high deductible plan—and these benefits have been increased for 2021.
