[Updated with latest 2021 HSA limits] Based on the latest IRS guidance, here are the latest Health Savings Account (HSA) limits. Following the trend in recent years, the amount individuals and families can contribute to these tax advantaged health savings account will see a modest increase in the coming year.
For 2021 the HSA contribution limits rose to $3,600 for those on self-only high deductible plans and $7,200 for those on family coverage plans. This represents a 1.5% increase or $50 for self-only coverage and $100 for family coverage compared to last year.
|Item||2021 limits||2020 limits||2019 limits|
|HSA annual contribution limits||Individual Limit – $3,600|
Family Limit – $7,200
|Individual Limit – $3,550|
Family Limit – $7,100
|Individual Limit – $3,500
Family Limit – $7,000
|HSA catch-up contributions||$1,000 if 55 or older||$1,000 if 55 or older||$1,000 if 55 or older|
|Minimum annual deductible||Individual coverage – $1,400 |
Family coverage – $2,800
|Individual coverage – $1,400 |
Family coverage – $2,800
|Individual coverage – $1,350
Family coverage – $2,700
|Maximum out-of-pocket expenses||Individual coverage – $7,000|
Family coverage – $14,000
|Individual coverage – $6,900|
Family coverage – $13,800
|Individual coverage – $6,750
Family coverage – $13,500
Given the rising cost of health care and the tax benefits of these accounts I highly recommend you contribute to one of these plans if your employer offers this option. They make a great tax effective investment option because they essentially work like a 401K or IRA where contributions and investment gains are tax free. And given most HSA accounts now allow you to choose how you invest (self-direct) the funds in those accounts, you can pick some high growth options to maximize your longer term returns.
My HSA story
I started investing in a HSA account several years ago and put 50% of my funds into a couple of broad based index funds (US stocks and Global stocks). My HSA account, thanks to rising stock markets over the last decade, has returned nearly 33% on average and I now have around $60,000+ in assets despite having to take the maximum out of pocket withdrawal a couple of times. Another example of the power of compounding.
Based on the triple tax free growth benefits (more of that in the points below), I have also shifted to using my normal savings to pay for health care costs while I work. This allows the HSA account to grow/compound tax free and maximize the longer term return of my contributions.
Further as I have changed employers, I always ensured I rolled over my prior HSA account to my new employer’s HSA (if it changed) to ensure I benefit from their lower negotiated fee structure and to make management of these accounts easier. See more on this below.
Lessons Learned – Don’t Use Your HSA Account To Make the Most of it!
You can read the following sections on the basics of HSA accounts. But because of their unique Triple Tax advantage, the best way to use these accounts is to not use the funds or ongoing contributions into these accounts and instead let them compound and grow tax free. That’s right, if you have enough disposable income, DO NOT use or really minimize the money you take out from your HSA account.
Here is why and how the triple tax advantage + compounding come into play
- By contributing the annual maximum (see table) above across broad based index funds you can expect a 6 to 7% tax free annual return on your contributions and re-invested gains. Plus by contributing through the year you can take advantage of dollar cost averaging (DCA). Over time and at this rate your funds should double every 7 to 8 years.
- By not making any withdrawals or minimizing what you have to take out, and instead using your other funds to pay for medical expenses, you can ensure your gains keep growing tax free and benefit from further compounding. The one caveat I would make here is to ensure you are also maxing out your 401K account up to at least what you get an employer match for (that’s free money)
- By doing the above for 20+ years you can grow your HSA account nearly two to four times more than someone who takes out more than 50% of the funds from the account every year. Further, and this is the third biggest tax advantage, is that all withdrawals that are used to pay for medical expenses are TAX FREE. Which as you get older can be a big help as health care on Medicare can be expensive (see section below for more). So this is like having an extra Roth IRA.
How Health Savings Accounts Work
Over the years, Health Savings Accounts, or HSAs, have provided a great way for individuals and families to cover the cost of medical and health care expenses that would otherwise not have been covered by their health insurance plan. Essentially Health Savings Accounts are tax advantaged medical savings accounts that you own. They work like 401K or IRA plans in essence, except that they are to be used for health related expenses. The funds that you contribute to an HSA are contributed on a pre-tax basis; that is they are not subject to federal taxes when you deposit them.
Similar to IRA accounts, you can contribute to your HSA account during any calendar year, through April 15th of the following calendar year. Contribution limits are indexed to inflation every year and set by the IRS every year. The latest annual contribution limits are shown in the table above. If an individual account holder or the owner of a family HSA is age 55 or older, an additional “catch-up” contribution of $1,000 is also allowed.
These Health Savings Accounts, working in conjunction with a high deductible health insurance plans (HDHP), allowing the account holder to deposit and invest funds that can be withdrawn and used for any number of different qualified health care related expenses. The minimum annual deductibles for a HDHP are shown in the table above for self-only coverage and family coverage.
This is the minimum deductible amount set on HDHP plans that employees have to cover with their HSA or personal funds. The maximum out-of-pocket limit (what you would have to pay) for HDHPs has also been provided in the table above.
In addition, any funds in your Health Savings Account that are not used during the calendar year, can be rolled over into the following year. Therefore, if funds are not used and they continue to roll over, the balance in your HSA account can grow significantly over time. This is a key advantage over the standard Flexible spending accounts (FSA), where you have to spend your contributions in the year/period you make them or lose the funds forever.
How to Choose the Right HSA
Prior to opening your Health Savings Account, you must decide on your high deductible health care plan with a private health care provider or via your employer. But, before funding your HSA, it is important to do some research on the actual account you will be depositing your funds into. This is because not all Health Savings Accounts are alike.
First, there are many entities that offer accounts through which to fund your HSA. These include banks, credit unions, insurance companies, and other approved companies. And, similar to bank and brokerage accounts, there could be a wide array of different interest rates, fees, and requirements within your HSA account.
In addition, make sure that you read the small print to be aware of any possible hidden account fees or charges to liquidate funds. Also, know if there is a minimum balance required in your account, and if so, how much.
Watch-out for Penalties
When you take distributions from your HSA to use for qualified medical expenses, these distributions are excludable from your taxable gross income. This is true even if you are not eligible to make contributions your HSA.
However, if you take any distributions from your Health Savings Account that are not considered qualified medical expenses, then these distributions are includable in your gross income. And, if you are under the age of 65, you will also be subject to an additional 10% tax as a penalty.
HSA withdrawal rules after 65
After your turn 65, you can take penalty-free distributions from the HSA for any reason. However, in order to be both tax-free and penalty-free the distribution must be for a qualified medical expense. Withdrawals made for other purposes will be subject to ordinary income taxes – which may not be too bad given people are generally in lower tax brackets after 65. But you also need to consider your other retirement income sources (401K, IRA).
But given the rising cost of health care and limitations in coverage of Medicare for all of your medical expenses, HSA accounts can be critical in covering qualified medical expenses in a tax effective manner.
Rolling over HSA accounts
Rolling over HSA accounts as you move from employers is as easy as rolling over 401K and IRA plans. You will just need to fill in a form at your current and potential existing provider to authorize the transfer. Normally takes one to two weeks. You can also move your HSA account to your own provider (may have slightly higher fees than an employer sponsored providers) and you can use those funds for any qualified medical expenses, if you don’t have a HDHP.
Mid-Year Plan or Employer Changes – How Does Affect HSA Contribution limits?
The annual amount you can contribute to a HSA is prorated to the number of months you are in an eligible HSA/HDHP plan. So if you change employers or move to a non-HSA supported health care plan (e.g PPO) then you will need to ensure you have only contributed for the months you were covered in an eligible plan.
For example, If you move mid-year, your maximum contribution limit will be 50% of the maximum annual contribution listed in the table above.
In Conclusion – Is a HDHP and HSA account right for me?
With the growing popularity of HDHP/HSA accounts for employers and employees many people are facing this question. Employers like and encourage employees towards these plans because they generally face a lower overall cost for providing employee coverage. While employees, especially the healthy ones like HDHP because it allows them to minimize their monthly premiums – 20 to 80% of traditional PPO plans in a lot of cases.
So if you or your family expect low to minimal health care or medical expenses in the coming year then a HDHP with HSA is by far the best option for you. If you do have medical issues and expect many doctor visits then a PPO plan may be better. The best thing is to compare the two options on a spreadsheet and do the math on figuring which is the best one for you and your family.
Health Savings Accounts provide a great way for individuals and families to pay medical expenses that are otherwise not covered. These expenses could include costs for preventive and wellness related programs that could potentially save you from future illnesses and other health related issues.