One of the best-kept secrets in financial planning is the health savings account. Not only do HSAs help you save toward one of the biggest costs you'll face in your lifetime -- healthcare expenses -- but they also give those who contribute to them some lucrative tax breaks that make them one of the most useful and beneficial tools you can add to your overall financial plan.
Every year, the rules covering health savings accounts change slightly, and most years, that gives HSA users a bit more of an opportunity to reap tax savings. Unfortunately, the 2020 HSA changes aren't expected to make it easier for people to qualify for using the accounts, but there's been a drive among policymakers to make HSAs more readily available to a larger portion of the American public.
Here's what's changing for HSAs in 2020
Most of the HSA changes taking effect in 2020 are adjustments for inflation. As costs of living go up over time, various numbers that are important for HSAs move higher to keep pace.
In a nutshell, here are the main changes to health savings accounts:
- The minimum amount that you're required to pay as a deductible for the high-deductible health plan (HDHP) coverage that's associated with the HSA will climb in 2020. For self-only coverage, the minimum will go up by $50 from $1,350 to $1,400. For family coverage, the new minimum of $2,800 will be $100 higher than the corresponding 2019 number of $2,700.
- The amount that insurance companies are allowed to have HDHP coverage charge as out-of-pocket maximums will also rise. The 2020 self-only out-of-pocket maximum will be $6,900, up $150 from 2019's $6,750 figure. For family coverage, the out-of-pocket maximum will rise $300 from $13,500 to $13,800.
- Best of all, the maximum amount you're allowed to contribute to an HSA will go up. Those with self-only coverage will be able to contribute $50 more in 2020 than they did in 2019, as the maximum goes from $3,500 to $3,550. Families will enjoy a $100 gain from $7,000 to $7,100. Catch-up contributions will still be available for those 55 or older, adding $1,000 to the limits above.
Let's look more closely at these provisions.
What it takes to use an HSA
The biggest obstacle to using health savings accounts is that you need to have high-deductible health plan coverage. A lot of the health insurance that workers get from their employer has lower deductibles than the HDHP guidelines above require, and so that locks out those workers from funding HSAs. Although employers have increasingly looked at adding HSA-eligible HDHP coverage to their list of available health insurance options, you still can't count on finding them everywhere.
Some policymakers have sought to broaden availability of HSAs, arguing that they give people more direct control over their healthcare spending and more of a financial incentive to look into less costly treatment options. Yet many workers shy away from HSAs because they aren't confident about having the savings needed to cover $1,400 or $2,800 in deductibles and $6,900 or $13,800 toward out-of-pocket maximums -- even when employers add their own contributions toward a worker's health savings account.
3 big tax breaks from HSAs
Yet the benefits of HSAs are enormous. First, workers get an immediate tax deduction for the money they contribute to a health savings account. Second, after making their contribution, they're then able to invest that HSA money on a tax-deferred basis, paying no taxes on interest, dividends, or capital gains within the account.
There's also a third benefit: Withdrawals from HSAs are tax-free as long as you use the money toward qualifying healthcare expenses. There are tax consequences if you end up taking money out to use for non-medical reasons, and penalties can apply under some situations. But if you stick to the spirit of why you set up the HSA in the first place, then the upfront deduction and tax-free income combine to be a powerful savings tool that no other tax-favored account can match.
How HSAs offer true flexibility
Finally, with HSAs, you never have to worry about spending all your money by a certain deadline. Unlike flexible savings accounts, which have similar tax benefits but require you to use contributed money or forfeit it on an annual basis, health savings accounts let you carry forward unused balances indefinitely. That can give you the confidence you want that your money will be there when you really need it.
Many people overlook health savings accounts, even if they have options to use them in their own financial lives. If you have access to a qualifying health plan, consider whether an HSA could save you money right now while also setting yourself up for a more financially secure future .