Maximizing Your Health Savings and Retirement Account Contributions in 2021
“Save more, spend less.” It’s a mantra that many of us have heard often and aspire to as well, even if we don’t always live up to the goal. But when it comes to our physical and financial health, it’s a goal that none of us can really afford to ignore.
In fact, it’s so important that the federal government offers tax breaks to those who save for their future health needs and post-retirement income. There are limits to those tax breaks, of course – but by making the most of them, you can reduce your tax bill today while making real progress in supporting your health and happiness for the future.
Here’s what you need to know to maximize your health, retirement, and tax savings this year...
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Maximizing your Health Savings Account (HSA) contributions in 2021.
A Health Savings Account (HSA) allows people with qualifying health insurance plans to save money to pay for eligible health expenses tax free. The money you put into (or contribute) to an HSA is tax-deductible, and disbursements (payments) made from the HSA for qualifying medical expenses are not taxed as income either.
In order to open an HSA, you must have a high-deductible health insurance plan. In 2021 that’s defined as a plan with an annual deductible of at least $1,400 for self-only coverage or $2,800 for family coverage. Your plan must also have a limit on out-of-pocket expenses. For 2021 that limit is $7,000 for self-only coverage and $14,000 for family coverage.
If you’ve just switched to a qualifying high-deductible health insurance plan, or if you’ve had one for some time but never opened an HSA, open one now and begin making regular contributions. If you’ve already got an HSA, make sure you’re on track to make the maximum annual contribution in order to save as much as you can for health expenses while saving on taxes, too.
The maximum you can contribute to an HSA in 2021 is up just slightly over last year – up to $3,600 if your health plan covers only yourself (a $50 increase from the 2020 limit), or $7,200 if you have family coverage (a $100 increase over 2020). In addition, if you’re 55 or older by the end of the year you can contribute an additional $1,000 in “catch-up” contributions. Just remember that if your employer makes contributions on your behalf that are excluded from your income, your contribution limit is reduced by that amount.
Maximizing your retirement plan contributions in 2021
There are a variety of retirement savings plans available, each with its own set of rules, restrictions and benefits. But they all offer one important benefit: the ability to save for retirement while also reducing the amount of income tax you’ll owe each year.
To maximize your retirement savings as well as your tax savings, make the maximum annual contribution to your account each year, if you are able. The maximum contribution allowed depends on the type of plan, and can fluctuate from year to year as tax laws change and limits are adjusted for inflation.
For 2021, the general contribution limits remain the same as in 2020 and are as follows: $19,500 for 401(k)s, 403(b)s, most 457 plans and the federal government’s Thrift Savings Plan; $6,000 for IRAs and Roth IRAs; and $13,500 for SIMPLE IRAs (a retirement plan designed for businesses with 100 or fewer employees).
In addition to these general limits, people age 50 and older are entitled to a “catch-up” contribution. This contribution amount also remains the same in 2021 as it was in 2020: $6,500 for 401(k)s, 403(b)s, 457 plans and the Thrift Savings Plan (for a total contribution of $26,000 for people age 50 and older); or an additional $1,000 for IRAs (for a total contribution of $7,000 for IRA account holders age 50 and older).
What has changed for 2021 is that employers can contribute up to $58,000 to an employee’s 401(k), an increase of $1,000 over the 2020 limit.
Contributions to 401(k)s, 403(b)s, 457 plans and the Thrift Savings Plan are all made pre-tax, so you realize the tax savings without actually having to take a deduction. IRA contributions, on the other hand, are made with income that has already been taxed, so you must take a deduction for the contributions on your tax return each year to get the tax savings.
It’s important to note, though, that there are limits to the deductions you can take for IRA contributions. If you have a traditional IRA, the deduction gradually phases out if your income is above a certain amount. If you have a Roth IRA, the amount you can contribute depends on your income. To be eligible to contribute the maximum in 2021, your adjusted gross income must be less than $125,000 if single or $198,000 if married and filing jointly. Contributions begin to be phased out for AGIs above those ranges and are reduced to $0 once your income reaches $140,000 if single or $208,000 if married and filing jointly.
Saving Well = Plan Well
Starting the new year off right financially is an essential ingredient to rebuilding or accelerating your life financial goals. Revisiting and establishing a forward looking and achievable retirement and healthcare savings is a basic component to Planning Well. If you need assistance prioritizing your finances to help you work toward your long-term financial life goals get in touch now or give our office a call at 860-928-2341. Together, we can leverage our Plan Well, Invest Well, Live Well process to help you get to the financial fearlessness you desire.
Presented by Principal/Managing Partner Laurence Hale, AAMS, CRPS®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259, 860-928-2341. http://www.whzwealth.com.
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