Think of Your HSA As an Extension of Your Emergency Fund

If you have a health insurance plan that includes a Health Savings Account (HSA), or if you plan to sign up for an HSA plan during the next round of open enrollment, here’s some good news: The IRS just announced that it will increase the amount of money. which you can contribute to your HSA in 2021.

This is not necessarily surprising news – the IRS is raising its HSA contribution limits almost every year. But if you are the type of person who loves to contribute as much as possible to your HSA, either to get tax breaks, or to make the most of the opportunity to save and invest money for future medical expenses, or because any the money left over in your HSA after age 65 becomes part of your retirement fund, here’s what you need to know:

  • The cap for individual plans will increase from $ 3,550 in 2020 to $ 3,600 in 2021.
  • The maximum contribution for family plans will increase from $ 7,100 in 2020 to $ 7,200 in 2021.

I know adding an extra $ 50 or $ 100 to your HSA in 2021 doesn’t sound like much, but let me quickly list all the other reasons you might benefit from a health savings account:

Emergency Medicine Fund

The Health Savings Account gives you the opportunity to set aside money for future medical expenses, whether you end up unexpectedly in the emergency room or need to buy a blood pressure cuff so you can inform your doctor at your next telemedicine conference.

(That last one was me, by the way, and my HSA refunded $ 42.75 almost immediately.)

Think of your HSA as an extension of your emergency fund if you like, or just think of it as a way to save money on any medical expenses you may have.

Savings before tax

You can contribute pre-tax income to your HSA – and more importantly, you do not need to pay taxes on money you withdraw from the HSA if you spend it on qualified medical expenses (or use it to reimburse yourself for qualified medical expenses ).

HSA is one of the few savings accounts that is virtually tax-free.

Future pension fund

You are allowed to invest money in your HSA in the same way you would invest money in an IRA or 401 (k) – and if you still have money in your HSA at the age of 65, you can consider that money as part of your retirement fund. …

HSA rules change after you turn 65; essentially, the account is treated like a traditional IRA. You can withdraw money for any purpose, without penalties, provided that you pay income tax on the withdrawal. However, if you are withdrawing money for qualified medical expenses, your withdrawals are still tax deductible.

Some people use this rule change to their advantage. They deposit the maximum amount of money into their HSA annually, but never withdraw cash from the account. Instead, they continue to pay out-of-pocket medical expenses and set aside HSA to pay for their medical expenses after retirement. If your income is high enough to allow you to increase your HSA annually and pay for all medical expenses separately, a medical savings account can be a great tool for retirement savings.

The HSA has one big disadvantage: you are only eligible to open a health savings account if you sign up for a high deductible health plan (HDHP). If you’re hoping to save on healthcare costs by finding a plan with a lower deductible, you won’t be able to save by opening an HSA. For many, the benefits of an HSA outweigh the risks of a high-deductible health insurance plan, and those benefits were only increased by 2021.


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