This article was last updated on April 19
[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 story: I started investing in a HSA account around 6 years ago and put 50% of my funds into Apple and Microsoft and the rest into a Vanguard Index fund. The account, thanks to rising stock markets over the last decade, has returned nearly 33% on average and I have around $50,000 in assets despite having to take the maximum out of pocket withdrawal in a couple of years. Another example of the power of compounding.
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 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.
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.