IRS announces 2021 health savings account contribution limits, there is still time to make 2019 and 2020 HSA contributions
The Internal Revenue Service today announced new, higher contribution limits for health savings accounts for 2021. You will be allowed to contribute $ 3,600 for individual coverage for 2021, up from $ 3,550 for 2020, or $ 7,200 for family coverage, compared to $ 7,100 for 2020.
In the meantime, you can still complete the contributions to the health savings account for 2019 until July 15, 2020, the deadline for the extended tax day linked to Covid-19. And it’s always a good time to check that your contributions for the 2020 calendar year are on track.
As more Americans are opening these triple-tax accounts, few are taking full advantage of the potential tax savings they offer. Some accounts are not funded. And only 6% of account holders choose to invest the money they contribute, according to the Employee Benefit Research Institute.
Is it Really Worth Keeping Track of a Dedicated Health Savings and Investment Account? Absoutely. With an HSA, you save money whether you use the money in the account for day-to-day health care expenses or invest it with the intention of using it to cover your health costs in retirement.
You can even use an HSA to save on a typical trip to CVS. With a tax relief provision built into the latest Covid-19 stimulus package, you can use the money you hide in an HSA or FSA (more details later) for over-the-counter drugs like Tylenol or Flonase as well as menstrual products like tampons and pads. This removes Obamacare’s restrictions on over-the-counter drugs that require a medical prescription in order for them to be eligible for reimbursement. Lively, a newbie HSA and FSA provider, has an updated list of qualifying expenses here.
As of January 2020, there were 29.4 million HSAs, holding $ 71.7 billion in assets, according to the Become HSA 2019 year-end research report. Contributions and asset growth are accelerating. At the end of 2019, investment account holders had an average total balance of $ 16,012, Devenir found.
Most HSAs are offered as benefits. But Lively and Fidelity Investments also offer individual HSAs at no cost to freelancers, independent contractors, and gig workers.
Here are the details on how HSAs work. You invest the money tax-free (usually through salary deferrals), it accumulates tax-free (you can invest it), and it comes out tax-free to cover expenses direct health care.
You can contribute to an HSA if you have a qualifying high-deductible health insurance plan. (For 2021, that means a plan with a minimum annual deductible of $ 1,400 for single coverage or $ 2,800 for family coverage.) If you’re 55 or older on December 31, you can save an additional $ 1,000 for that year. (This catch-up amount is not subject to inflation adjustments.) If you are married, have family coverage, and your spouse will be 55 by the end of the year, he or she can also save aside from the $ 1,000 catch-up – but only in its own HSA, which can be set up specifically to accept these contributions. Here is a link to the IRS 2020-32 tax procedure with the official numbers.
At a minimum, you should put enough money in your HSA to cover your annual health plan deductible. If you have reduced your annual contribution, you can complete it up to the tax year declaration deadline. Let’s say you get an unexpected big doctor bill. You can put money in your HSA, withdraw it right away, and the government just paid maybe 25% of the bill. The higher your tax bracket, the greater your savings.
A smart strategy for high income earners is to invest the money in your HSA for the long term. Once you are 65, you can purchase tax-exempt distributions to cover Medicare premiums. If you withdraw money at this point for non-medical purposes, you pay the same tax as withdrawals from a 401 (k) before tax. But you can also withdraw money tax-free to reimburse you for medical expenses from previous years if you have the old receipts.
Note HSAs are a different beast from healthcare FSAs (sometimes confusingly referred to as healthcare expense accounts). FSAs have lower contribution limits and are riskier because you have to spend the money in a year or you lose it (some FSAs have a carryover provision of $ 500). In contrast, the money you put in an HSA is yours forever – you can spend it whenever you want. If you have an HSA-eligible health plan, you cannot also put money into a regular FSA, but you can put money into a limited FSA for dental and vision care costs only. .
See also, IRS Covid-19 Fix for Flexible Spending Accounts for Occupational Health and Dependent Care: Mid-year changes are now allowed.