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2021 HSA Changes: Use Health Savings Accounts If You Can

By Dan Caplinger – Aug 14, 2020 at 8:32AM

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These tax-favored accounts are among the best available -- as long as you qualify.

Health savings accounts (HSAs) are a great way to get valuable tax breaks in exchange for setting aside money for future healthcare expenses. Unfortunately, they're only available to those who have specific types of health insurance plans with high deductibles. But for those who qualify, the tax benefits are so lucrative that many people use HSAs as long-term investing vehicles with the intent of paying healthcare expenses in retirement.

At present, the IRS doesn't expect major changes to the provisions governing health savings accounts. As a result, only small inflation-related adjustments are likely to apply to HSAs in 2021. Below, we'll look more closely at those new figures and whether more dramatic changes could come in the future.

Piles of coins with letter blocks on top reading HSA.

Image source: Getty Images.

2021's HSA changes

Most of the provisions governing health savings accounts are indexed to inflation. Therefore, from year to year, you can expect incremental increases in most of the specified dollar figures that apply to HSAs. In 2021, adjustments include the following:

  • Maximum HSA contributions will rise slightly. Those who cover only themselves under a qualifying health insurance plan will be able to set aside up to $3,600 in 2021, up $50 from 2020's limits. The corresponding figure for those who have whole-family coverage will be $7,200, up $100 from 2020. If you're 55 or older, you'll be able to contribute an extra $1,000 as a catch-up contribution.
  • To qualify, your health insurance plan has to meet certain requirements as a high-deductible health plan. However, it can't force you to pay more than specified maximum out-of-pocket amounts. For 2021, the amount for self-only policies will go up $100 to $7,000. Family policies have a $14,000 cap on out-of-pocket spending, up $200 from 2020 levels.

Ordinarily, there'd be adjustments to the minimum deductible that you're required to pay before qualifying health plan coverage kicks in. However, the inflation factor was too small for any changes to apply. Therefore, the 2020 minimums of $1,400 for self-only policies and $2,800 for family policies will also apply in 2021.

Why you should want an HSA

It's hard to find a tax break more attractive than the health savings account. You get a triple benefit from an HSA:

  • You can deduct your HSA contribution from your current taxes.
  • You can invest your HSA money and not pay any taxes on income or capital gains, as long as the money stays in the account.
  • As long as you withdraw HSA money for qualifying healthcare expenses, you don't have to pay any taxes on withdrawals -- whether it's your original contribution or the income generated along the way.

Only if you use money for purposes other than healthcare will you face potential taxes and penalties. That's a valuable asset to have on your side.

Moreover, HSAs aren't like other types of accounts designed to help people save for healthcare costs. Flexible savings accounts are even more popular than HSAs because many employers make them available regardless of which type of health insurance plan you use. However, with FSAs, you typically have to use all your contributed money each year or else you lose it.

There's no forfeiture of HSAs. You can carry that money as far into the future as you like -- maximizing your potential growth.

See if you can use an HSA

Not all employers offer health plans that qualify for use with HSAs. However, if yours doesn't, it's worth asking whether your employer would consider adding an HSA option. Costs can be lower for businesses, as well as individual workers, so it isn't always as tough a sell as you might think.

HSAs can be great tools to save toward your healthcare expenses both now and in the future. Talk to your employer to see if you qualify, and if so, talk to your financial institution about what's involved in setting one up. The tax benefits alone are worth the time and effort.

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