The annual contribution limits for health savings accounts keep climbing.
The new limits are:
- $3,550 for someone with self-only health insurance coverage (up from $3,500 for 2019).
- $7,100 for someone with family coverage (up from $7,000 for 2019).
This is great news for anyone who is eligible to use an HSA, as this type of account offers a combination of tax-reducing features that is unrivaled, even by tax-advantaged retirement plans like 401(k)s or individual retirement accounts.
What is a health savings account?
An HSA is an account into which you can deposit a certain amount of money each year to reimburse yourself for eligible medical expenses.
You also may be able to use an HSA as a savings account or an investment account, depending on the account custodian. (Money Talks News partner Lively is an example of an HSA custodian that gives account holders the option to invest the money they put in their HSA in mutual funds and other similar types of investments. However, not all custodians allow account holders to invest.)
As we explain in “3 Reasons You Need a Health Savings Account — and How to Open One Today,” HSAs offer a trio of tax advantages:
- Your contributions are tax-deductible in the tax year for which they are made.
- Gains on your contributions are tax-free.
- Your withdrawals are tax-free if you use them to pay for qualifying health care expenses.
In other words, you will never owe taxes on money that goes through an HSA, provided that you follow the IRS rules for HSAs and make withdrawals for qualifying health care expenses. Not even a retirement account like a Roth IRA offers that degree of lawful tax avoidance.
Additionally, you do not need to earn income to contribute to an HSA, unlike most retirement accounts.
It’s no wonder that the number of HSAs held by Americans jumped by 13% last year.
Who is eligible for a health savings account?
The bad news about HSAs is that not everyone is eligible for one. They’re designed for folks with high-deductible health insurance plans.
For 2020, the IRS defines such plans as having annual deductibles of at least:
- $1,400 for self-only coverage (up from $1,350 for 2019).
- $2,800 for family coverage (up from $2,700 for 2019).
There are also a few other limitations on who can have an HSA. For example, folks on Medicare are ineligible.
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