If you have a health insurance plan that comes with a health savings account (HSA) or if you’re planning to sign up for a HSA plan during the next round of Open Enrollment, here’s some good news: The IRS just announced it will increase the amount of money that you can contribute to your HSA in 2021.
This isn’t necessarily surprising news—the IRS raises HSA contribution limits nearly every year. But if you’re the type of person who likes to make the maximum possible contribution to your HSA, either to reap the tax benefits, to maximize on the ability to save and invest money for future medical expenses or because any money left in your HSA after age 65 becomes part of your retirement fund, here’s what you need to know:
The maximum contribution for individual plans will increase from $3,550 in 2020 to $3,600 in 2021.The maximum contribution for family plans will increase from $7,100 in 2020 to $7,200 in 2021.I know that adding an extra $50 or $100 to your HSA in 2021 doesn’t sound like much, but let me quickly recap all of the other reasons you might benefit from a health savings account:
A healthcare emergency fund
A health savings account gives you the opportunity to set money aside for future medical expenses, whether you unexpectedly find yourself in the ER or whether you need to buy a blood pressure cuff so you can report to your doctor during your next telemedicine conference.
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(That last one was me, btw—and my HSA reimbursed the $42.75 almost immediately.)
Think of your HSA as an extension of your emergency fund, if you want—or simply think of it as a way to save cash for whatever healthcare expenses might come your way.
Pre-tax savings
You get to put pre-tax income into your HSA—and, even more importantly, you don’t have to pay taxes on money you withdraw from your HSA as long as you spend it on qualified medical expenses (or use it to reimburse yourself for qualified medical expenses).
HSAs are one of the few savings accounts that are essentially tax-free.
A future retirement fund
You are allowed to invest the money in your HSA just as you might invest the money in an IRA or 401(k)—and if there is still money in your HSA at age 65, you can treat that cash as part of your retirement fund.
The HSA rules change after you turn 65; essentially, the account is treated like a traditional IRA. You can withdraw money for any purpose, without penalty, as long as you pay income tax on the withdrawal. If you withdraw money for qualified medical expenses, however, your withdrawals are still tax-free.
Some people use this rule change to their advantage. They contribute the maximum amount of money to their HSA every year but never withdraw any cash from the account. Instead, they continue to pay medical expenses out-of-pocket and save the HSA to pay for their healthcare costs post-retirement. If your income is robust enough to allow you to max out your HSA every year and pay for all your medical expenses separately, a health savings account can be an excellent retirement savings tool.
There’s one big downside to a HSA, and it’s that you are only eligible to open a healthcare savings account if you sign up for a high deductible health plan (HDHP). If you are hoping to save money on healthcare costs by finding a plan with a smaller deductible, you won’t be able to save money by opening a HSA. For many people, the benefits of the HSA outweigh the risks of a high deductible health insurance plan—and those benefits were just increased for 2021.
