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You Can Contribute More to an HSA in 2021. Here's Why You Should.

By Christy Bieber – Jun 21, 2020 at 6:38AM

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This account provides some of the best tax breaks.

Health savings accounts (HSAs) are one of the most valuable tax-advantaged investments, but they're often overlooked.

HSAs aren't open to everyone; you need a qualifying high-deductible health plan to be eligible. But if you qualify, there's some good news: The amount you can invest in your account is going up next year. That means you can, and should, put a little extra in this account to help build a more secure future.

Doctor talking with patient.

Image source: Getty Images.

HSA contribution limits are rising 

First things first: You can make tax-deductible contributions in a health savings account only if you have a qualifying high-deductible health plan. According to the IRS, for 2021, that means the following:

  • Individual plans must have a deductible of $1,400 or above, and the maximum out-of-pocket limit on the plan can't exceed $7,000. 
  • Family plans must have a deductible of $2,800 or above, and the maximum out-of-pocket limit can't exceed $14,000.

In terms of these requirements, the minimum deductible amounts remain the same as last year, but the maximum out-of-pocket limit has gone up to $100 for individuals and $200 for family plans. 

If you meet these requirements, the annual contribution limit for 2021 will be:

  • $3,600 for an individual plan, up from $3,550 in 2020.
  • $7,200 for a family plan, up from $7,100 in 2020. 

This means those with individual plans, called self-only coverage, will be able to contribute $50 more next year, and those with a family plan can contribute an additional $100 to their account. 

Here's why you should aim to max out your HSA

Medical care can be really expensive even with health insurance, especially if you have a high-deductible plan. Around one in three Americans has expressed concerns about rising care costs and more than half of all Americans have actually put off care because of costs, according to two surveys.

Investing in an HSA makes it easier to cover medical bills since you can pay for your care with untaxed dollars. You'll also have the money ready in the account when you need it during a health crisis so you don't have to worry about coming up with cash when you're ill. 

And while you can use the money to cover immediate costs if you need to, you also have the option to invest your contributions and let them grow. This can be an especially smart if you don't need the money now since it will grow tax-free.

If you contribute to your HSA and leave the money alone, you can use it to cover care costs as a retiree, which could be as much as $369,000 in out-of-pocket expenses for a senior couple. The money in your health savings account could make a huge difference in preserving your retirement nest egg if you or your spouse gets sick. 

Plus, if you're lucky enough to stay healthy, the money won't go to waste. Although you pay a penalty if you make withdrawals for anything other than covered care costs before 65, the rules change once you hit that age. You can start taking money out for any purpose after your 65th birthday, although you would pay income tax on the withdrawn funds if you don't use them for medical needs.

Reworking your budget now will pay off

Since the IRS has announced early on that HSA contribution limits are rising for 2021, you have plenty of time to look for cuts to your budget to make sure you're able to invest more in your account.

It's worth a close look at your spending so you can free up some extra cash to invest, and have money for healthcare expenses now or as a senior. 

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