Limits for This Tax-Free Account Will Increase in 2021

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Photo by Krakenimages.com / Shutterstock.com

The annual contribution limits for health savings accounts keep climbing.

After raising the limits for 2019 and for 2020, the IRS announced on May 20 that it will raise them again for 2021 to account for inflation.

The new limits are:

  • $3,600 for someone with self-only health insurance coverage (up from $3,550 for 2020).
  • $7,200 for someone with family coverage (up from $7,100 for 2020).

The limit for catch-up contributions, which allow folks age 55 and older to save more money in HSAs, is not increasing. That limit is still $1,000. So, for 2021, someone who is at least 55 can contribute a total of $4,600 or $8,200 to an HSA, depending on what type of plan they have.

The rising annual contribution limits are 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 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 be used 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 Ways a Health Savings Account Can Improve Your Finances,” 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% in 2019.

Who is eligible for a health savings account?

The bad news about HSAs is that not everyone is eligible for one. They’re designed to be used by folks with high-deductible health insurance plans.

For 2021, the IRS defines such plans as having annual deductibles of at least:

  • $1,400 for self-only coverage (unchanged from 2020)
  • $2,800 for family coverage (unchanged from 2020)

There are also a few other limitations on who can have an HSA. For example, folks on Medicare are ineligible.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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