Smart Tax Planning

IRS will allow people to put away more money in health savings accounts

Key Points
  • The IRS has raised the contribution limits for health savings accounts, a tax-favorable way to help cover qualified medical expenses.
  • In 2021, you’ll be able to stash up to $3,600 into an HSA if you have self-only coverage through a high-deductible health plan. Accountholders with family plans can save up to $7,200.
  • Amounts saved in an HSA roll over from one year to the next. You can use your funds to cover health care costs in the present or in retirement – and do so free of taxes.
Tom Werner

Next year, the IRS will allow people to put away even more money in health savings accounts, a tax-advantaged account you can use for medical expenses.

Health savings accounts work alongside high deductible health plans. You can save money on a pretax or tax-deductible basis, have it grow tax free and then use the money to cover health care costs free of taxes.

Workplace HSAs have a fourth surprise benefit: Pretax contributions you make to your HSA, as well as contributions your employer makes to the account, avoid Social Security and Medicare taxes.

In 2021, the HSA contribution limit will rise to $3,600 for people with self-only coverage in a high deductible plan, according to the IRS.

That's up from $3,550 in 2020.

Those with family plans will be able to stash up to $7,200 in 2021, which is up from $7,100 in 2020.

Accountholders who are over age 55 can save an extra $1,000 annually as a catch-up contribution.

Key differences between an HSA and FSA

What is a health savings account (HSA)?
What is a health savings account (HSA)?

HSAs sound similar to the features of another tax-favored account you might find at work: the health care flexible spending account.

FSAs are like HSAs in that the contributions are made on a pre-tax basis, savings grow tax free, and withdrawals can be made on a tax-free basis for medical expenses.

However, there are major ways the two accounts differ.

For starters, contribution limits are much lower in a health care FSA. You can put away up to $2,750 in your FSA this year.

Further, you can roll over the balance in your HSA from one year to the next. Depending on your HSA provider, you could invest your savings and have it grow over the course of many years.

Health care FSAs, on the other hand, have an expiration date attached to them. Generally, you have until the end of the calendar year to use the money saved.

Employers have the option of letting you rollover $500 from your FSA into the following year – or they may give you until March 15 to spend the money. But they aren't obligated to give you those choices.

Finally, your HSA is fully portable. You can take it with you if you leave your employer. 

On the other hand, you can't maintain your FSA if you change jobs. In that case, you'll want to spend down the account as quickly as possible.

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