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For many people, health savings accounts (HSAs) offer a tax-friendly way to pay medical bills. You can deduct your contributions to an HSA (even if you don't itemize), contributions made by your employer are excluded from gross income, earnings are tax free and distributions aren't taxed if you use them to pay qualified medical expenses. Plus, you can hold on to the account past your working years and use it tax-free for medical expenses in retirement. All-in-all, HSAs can be a great tool for covering your health care costs.

There are, however, a few HSA limitations and requirements that are adjusted for inflation each year. They apply to the minimum deductible for your health insurance plan, your annual out-of-pocket expenses and the amount you can contribute to an HSA for the year. If you're not in compliance with the restrictions in place for any particular year, then you can say goodbye to the HSA tax savings for that year.

To contribute to an HSA, you must be covered under a high deductible health plan. For 2020, the health plan must have a deductible of at least $1,400 for self-only coverage ($1,350 for 2019) or $2,800 for family coverage ($2,700 for 2019).

The health plan must also have a limit on out-of-pocket medical expenses that you are required to pay. Out-of-pocket expenses include deductibles, copayments and other amounts, but don't include premiums. For 2020, the out-of-pocket limit for self-only coverage is $6,900 ($6,750 for 2019) or $13,800 for family coverage ($13,500 in 2019). According to the IRS, only deductibles and expenses for services within the health plan's network should be used to determine if the limit applies.

Finally, your contributions to an HSA are limited each year too. You can contribute up to $3,550 in 2020 if you have self-only coverage or up to $7,100 for family coverage ($3,500 and $7,000, respectively, for 2019). If you're 55 or older at the end of the year, you can contribute an extra $1,000 in 2020 (same as in 2019). However, your contribution limit is reduced by the amount of any contributions made by your employer that are excludable from your income, including amounts contributed to your HSA account through a cafeteria plan.

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