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HSA Maximum Contribution

Each year, the IRS sets maximum contribution limits for health savings accounts (HSAs). For 2020, this limit increased slightly from 2019 due to changes in cost of living as was determined by the IRS. There are certain circumstances under which you can breach these limits without penalty, but you need to know the specifics of these rules. If you have questions about using an HSA to pay for medical expenses or save for retirement, consider speaking with a financial advisor.

What Are the HSA Contribution Limits for 2020?

The HSA maximum contribution for 2020 stands at $3,550 for individual coverage and $7,100 for family coverage. However, these rules apply to people who keep their HSA coverage status for the entire year. The limits apply a bit differently for those who change coverage mid-year, which could occur because of a marriage, divorce or job change.

HSA Contribution Limits for 2020 When You Change Coverage

Any time you change your HSA status from single coverage to family coverage or vice versa, your maximum contribution for the year changes to the greater of the following options:

  • Option 1: Maximum annual contribution limit based on coverage status for each month of the tax year combined, and then divided by 12.
  • Option 2: Maximum annual contribution based on coverage status on Dec. 1 of the tax year change was made.

This is a bit complex, so let’s go over some examples. Say you’re starting out with family HSA coverage in January 2020 and you switch to single coverage in July. Under the first option, your maximum contribution limit for 2020 becomes $5,325 (average of maximum contribution limits for six months of single coverage and six months of family coverage).

You’d take the result of the first option because it would rise above that of option 2. In this case, your coverage status on Dec. 1 (single coverage) would be only $3,550.

Now, what if you pick a health insurance plan and open an HSA account last minute? Well you can then take advantage of the “last month rule.” This dictates that if you were eligible for an HSA on Dec. 1 of the tax year, you’re considered eligible for the whole year. This means you may contribute the full amount based on your coverage status.

To keep this perk, however, you must remain covered until Dec. 31 of the following year. If you fail to do so, you’d owe income tax based on the contributions you made during the time you stayed eligible (except for the ones you made based on the last month rule) plus a 10% penalty tax.

What If You Want To Contribute More to Your HSA?

When you turn 55 years old, the IRS allows you to make additional “catch-up” contributions of $1,000 to your HSA medical account. Federal law sets this static rate, so the IRS doesn’t adjust it every year for inflation.

But it gets a little tricky for family coverage HSAs. HSAs, including family coverage, ones exist under one account holder’s name. So, technically, there is no joint HSA. This means that if you’re married, you and your spouse can’t make $2,000 worth of catch-up contributions to the same HSA even if you’re both 55 or older. In this case, each may want to open a separate single-coverage account. But the decision can get complicated. So you might want to find a financial advisor to weigh the pros and cons of doing so.

In addition, you can continue making contributions into your HSA after turning 65 as long as you’re not also enrolled in Medicare as the IRS consider this a change in coverage. Regardless of age, however, it’s important to contribute as much as you can.

Why You Should Meet the HSA Maximum Contribution Limits for 2020

You can make tax-deductible contributions up to the maximum in 2020. This means that come tax time, you can reduce your federal taxable income by the amount you contributed.

So say you’re making $40,000 in 2020. You have a single coverage HSA and contributed $3,550. As a result, Uncle Sam taxes you as if your income was $36,450 that year.

As long as you’re enrolled in an HSA-eligible high-deductible health plan (HDHP), you have until April 15, 2020 to reach your maximum and claim it as a deduction for tax year 2021.

How Can You Meet HSA Contribution Limits for 2020?

HSA Maximum Contribution

In order to contribute to an HSA, you must be enrolled in an eligible HDHP. The IRS defines what a high deductible health plan actually is.

For 2020, an HDHP must carry a deductible of at least $1,400 for single coverage. That minimum climbs to $2,800 for family coverage. And the out-of-pocket maximum for an HDHP can’t exceed $6,900 for single coverage. For family coverage HSAs, the out-of-pocket maximum can’t breach $13,800.

But that’s not all. Your HDHP must also pass other tests. For example, you won’t qualify to open an HSA if you’re HDHP covers any non-preventive care benefit before you meet your deductible. So ask your insurance carrier or employer’s benefits department if your HDHP can link to an HSA based on IRS requirements. If not, you may want to switch to a plan that can be paired with an HSA. The bright side is that you can open an HSA through a bank or financial institution even if your employer doesn’t offer one, as long as your HDHP makes the cut.

Bottom Line

HSA Maximum Contribution

Contributing to an HSA can be as beneficial as it is complicated. Ultimately, you have to follow IRS rules. If you stay covered by an HDHP for the entire year, the HSA maximum contribution for 2020 is pretty clear cut. But make sure you understand the rules that apply when you change or lose coverage mid-year for whatever reason.

Remember, you can start making additional catch-up contributions when you turn 55, and you can continue contributing after age 65 only if you meet standard eligibility and are not enrolled in Medicare. Regardless, the money in your HSA is yours to keep. You can use it tax-free on any qualified medical expense. Limits change each year so keep an eye on annual announcements from the IRS.

Tips for Retirement Planning

  • financial advisor can help you determine how best to use your HSA. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
  • If you have eligible HDHP but your employer doesn’t offer an HSA, you can open one through many financial institutions. To start, consider our list of the best banks in the U.S.
  • An HSA serves as one of many beneficial tax-advantaged retirement vehicles. Another good option is an individual retirement account (IRA). Use our retirement calculator to see whether your retirement savings have you on pace for a secure retirement.

Photo credit: ©iStock.com/Mrfiza, ©iStock.com/Robertindiana, ©iStock.com/skodonnell

Javier Simon, CEPF® Javier Simon is a banking, investing and retirement expert for SmartAsset. The personal finance writer's work has been featured in Investopedia, PLANADVISER and iGrad. Javier is a member of the Society for Advancing Business Editing and Writing. He has a degree in journalism from SUNY Plattsburgh. Javier is passionate about helping others beyond their personal finances. He has volunteered and raised funds for charities including Fight Cancer Together, Children's Miracle Network Hospitals and the National Center for Missing and Exploited Children.
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