Health savings accounts (HSAs) are tax-advantaged investment accounts for individuals with qualifying high-deductible health plans (HDHP). If your health insurance plan meets the requirements to be considered an HDHP, you can make tax-deductible contributions to an HSA, allow your money to grow, and take tax-free withdrawals to cover qualifying medical expenses.

Because an HSA provides tax savings both when making contributions and when making withdrawals, it is a valuable account to help save for medical care or for retirement. However, there are rules for how much you can save in your HSA each year.

Here are the HSA contribution limits for 2020. 

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Maximum HSA contribution limit in 2020

The maximum HSA contribution limit can change from year to year and varies depending on whether you have self-only (individual) coverage or a family insurance plan. The table below shows contribution limits for both 2020 and 2021. 

Type of Coverage 2020 Contribution Limit 2021 Contribution Limit
Self-only coverage $3,550 $3,600
Family coverage $7,100 $7,200

Table source: Internal Revenue Service (IRS).

The IRS announces the HSA contribution limit that applies annually. You can review IRS Publication 969 each year to determine the current limit. 

It's also important to note that this is an aggregate limit that applies to both your own contributions as well as any money your employer puts into your account. This is different from 401(k) rules, where employer matching funds do not affect your ability to contribute to your account. If your employer puts $2,000 into your HSA and you have self-only coverage, you would be allowed to contribute only $1,550 before hitting the 2020 contribution limit. 

HSA catch-up contributions

HSA account holders who are 55 and older are entitled to make an additional catch-up contribution valued at $1,000 on top of the above contribution caps. Because of the HSA catch-up contribution rules, the table below shows the maximum contributions that can be made if you are 55 or over. 

Type of Coverage 2020 Contribution Limit 2021 Contribution Limit
Self-only coverage $4,550 $4,600
Family coverage $8,100 $8,200

Table source: IRS

Catch-up contributions are intended to help older Americans who may incur outsized medical expenses, or who may not have saved enough for a secure retirement and want to boost their contributions to tax-advantaged accounts as they near the end of their careers. 

Older Americans may want to make catch-up contributions because healthcare costs tend to rise with age and because an HSA can be a valuable type of retirement savings account. HSAs work as a retirement savings plan because money can be withdrawn penalty-free for any purpose, not just medical expenses, after age 65. Once an HSA account holder turns 65, distributions not used for medical costs are taxed at their ordinary income tax rate, the same as distributions from a 401(k) or traditional IRA

How does a health savings account affect taxes when I contribute?

Because HSA contributions can be made with pre-tax funds, you can deduct the amount you've contributed from your taxable income in the year you make the contribution.

The fact that HSA contributions are tax deductible means any money you contribute reduces the income you're taxed on, which saves you money on your IRS bill. It also means your take-home pay declines by a smaller amount than what you actually contributed. 

For example, if you have $50,000 in taxable income and make a $3,550 deductible contribution to an HSA, you will be taxed on only $46,450 in income due to your contribution. If you are in the 22% tax bracket, you will save $781 in income taxes because you aren't taxed on the $3,550 that was deducted. Although you will have invested $3,550, your take-home pay will only be $2,769 smaller because of the tax savings. 

The specific amount you save due to your HSA contribution will depend both on how large your contribution is and on your tax rate. Those who are taxed at a higher rate and those who make larger contributions will realize more savings.