Healthcare can be a whopping expense for working Americans and retirees alike. Thankfully, it's possible to set funds aside for current and future medical expenses in a tax-advantaged fashion, thanks to a helpful tool known as the health savings account, or HSA.
With an HSA, the money you contribute doesn't have to be used up year after year like with a flexible spending account. In fact, the point of an HSA is to put in more money than you think you'll need in a given year so that you can invest the excess and grow it into a larger sum. And if you carry that sum with you into retirement, you'll have a means of paying your healthcare expenses during your senior years.
The beauty of HSAs is that they're triple tax-advantaged: The money you contribute goes in tax-free, growth on investments in your account is tax-free, and withdrawals are tax-free provided they're taken for qualified medical expenses. When you compare these benefits to those of popular retirement savings plans, like traditional IRAs and 401(k)s, you get the same tax-free contributions but not the same tax-free growth and withdrawals. (Investment gains in traditional IRAs and 401(k)s are tax-deferred and withdrawals are taxed in retirement as ordinary income.)
But as is the case with other tax-advantaged savings plans, the rules surrounding HSAs can shift from year to year. Here are three important changes you need to know about for 2020.
1. You'll need an even higher deductible to qualify
Not everyone can participate in an HSA. To qualify, you must be on a high-deductible health insurance plan, which, for the current year, means having a deductible of $1,350 or more for individual coverage or $2,700 or more for family coverage. For 2020, these limits are increasing by $50 and $100, respectively. That means you'll need an individual deductible of $1,400 to fund an HSA next year or a family level deductible of $2,800.
2. Contribution limits are going up
Each year, the IRS determines how much money HSA participants can put into their plans. Currently, those limits are set at $3,500 for individual coverage and $7,000 for family coverage. Workers 55 and older, meanwhile, get a $1,000 catch-up contribution on top of whichever limit applies to them.
For 2020, contribution limits are increasing by $50 for individual participants and $100 for those who participate at the family level. Those with self-only coverage will therefore get to contribute $3,550 a year, and those contributing on behalf of a family can put in $7,100. The $1,000 catch-up contribution for older workers remains as is.
3. Annual out-of-pocket maximums are increasing
To participate in an HSA, your out-of-pocket maximum can't exceed a certain threshold. Currently, that threshold is $6,750 for individuals and $13,500 for families. Come 2020, these limits will rise to $6,900 for individual coverage and $13,800 for coverage at the family level.
It pays to fund an HSA
If you have the option to contribute to an HSA next year, you should absolutely take it. HSAs give you more wiggle room with your money than flexible spending accounts and also offer the opportunity to invest your funds for added growth.
Remember, too, that health plans can change over time, so even if you didn't qualify for an HSA this year, you may be eligible to fund one in 2020. Of course, the opposite holds true, too: Just because you're eligible for an HSA this year doesn't mean you'll qualify next year, so pay attention to your health insurance plan details as they become available to you.