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This Tax-Advantaged Account Is Changing in 2021. Here's What You Need to Know
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This Tax-Advantaged Account Is Changing in 2021. Here's What You Need to Know

This Tax-Advantaged Account Is Changing in 2021. Here's What You Need to Know

Whether you're starting out your career or getting close to retirement, your goal should be to pay the IRS as little tax as possible. And health savings accounts (HSAs) can help you do just that.

HSAs are unique in that they're triple tax-advantaged. Contributions are made with pre-tax dollars, investment growth in an HSA is tax-free, and withdrawals from your account are tax-free provided they're used to cover qualified medical expenses. By contrast, with a traditional IRA or 401(k) plan, you'll get the same tax-free contributions, only you'll pay taxes on withdrawals. And with Roth IRAs and 401(k)s, you'll do the opposite -- fund your account with after-tax dollars but enjoy tax-free growth and withdrawals.

It's for this reason that HSAs are so valuable, and the fact that HSA funds never expire make them a great savings tool not just for the near term, but also for retirement. But the rules surrounding HSAs can change from year to year, so here's what you need to know going into 2021.

Image source: Getty Images.

1. The definition of a high-deductible health plan isn't changing

Eligibility for an HSA hinges on being enrolled in a high-deductible health insurance plan. For the current year, that means an individual deductible of $1,400 or more, or a family level deductible of $2,800 or more. For 2021, these limits will continue to hold.

2. The annual out-of-pocket maximum is going up

Health insurance plans have maximum out-of-pocket amounts that participants pay, and these limits must conform to HSA standards. For the current year, you'll qualify for an HSA with an annual out-of-pocket maximum of $6,900 as an individual, or $13,800 as a family. Come 2021, these limits are increasing to $7,000 and $14,000, respectively.

3. HSA contribution limits are rising

The more money you're able to put into an HSA, the more you stand to lower your taxes immediately. And in that regard, here's some good news: HSA limits are increasing next year. Currently, they stand at $3,550 for individual coverage and $7,100 for family coverage. Next year, they'll rise to $3,600 and $7,200, respectively. Additionally, workers who are 55 and older are currently eligible to make a $1,000 catch-up contribution in an HSA. That option will remain on the table next year as well.

It pays to participate in an HSA

If you have the option to fund an HSA, doing so could lower your taxes and make it easier to pay for medical expenses both in the near term and well into the future. Furthermore, you can open an HSA even if your employer doesn't offer one. As long as you meet the eligibility requirements outlined above, an HSA could be a smart savings tool that serves you well both immediately and for many years to come.

One final thing to keep in mind about HSAs is that once you turn 65, you can withdraw your money for any purpose without being penalized. While you will pay taxes on withdrawals in that scenario, it's still a good way to secure some backup income for retirement, when you might really need it.

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