Posted on 08/02/2018 10:16:47 AM PDT by Red Badger
Legislation that would dramatically increase an important contribution limit just cleared a major hurdle.
The House of Representatives recently passed two pieces of legislation that would make significant changes to health savings accounts (HSAs), including a massive increase in the amount of tax-deferred contributions that could be made to them. These changes could not only allow Americans to get more of a tax deduction for their healthcare expenditures, but they could also help participants build their retirement nest eggs at a faster rate.
Here's a rundown of what the new HSA contribution limit could be, why it matters for retirement savings, and some of the other changes the bills would make.
The HSA contribution limit could nearly double
One of the major provisions in the HSA bill known as the Increasing Access to Lower Premium Plans and Expanding Health Savings Accounts Act would dramatically increase the annual contribution limit to these accounts.
For 2018, the maximum HSA contribution is $3,450 for individual health plans or $6,850 for family health coverage. The bill would nearly double these limits, to $6,650 (individual) and $13,300 (family).
The reason for the change? These new limits would be identical to the out-of-pocket maximums that high-deductible health plan participants can be required to pay. The idea is that people will be allowed to contribute enough to their HSAs to cover every possible healthcare expenditure they could face. Wait -- why does the HSA limit matter for retirement savings?
If you're not too familiar with how HSAs work, you may be wondering why I'm discussing them in the context of retirement savings. However, there's a very good reason.
There are a few excellent features of the HSA that makes this account type an excellent retirement savings vehicle, as well as a great way to help manage healthcare costs. Specifically:
HSA contributions are made on a tax-deferred basis, so you get a current-year tax deduction for contributing. Plus, any withdrawals for qualified healthcare expenses are tax-free. An HSA is the only tax-advantaged account that offers this type of double tax benefit. After you contribute, you can invest your HSA funds in a variety of investment options, similar to a 401(k). HSA funds carry over from year to year, so any funds that you don't use to cover healthcare expenses (and the investment returns they generate) can accumulate in the account. Once you turn 65, you can withdraw HSA funds penalty-free for any reason. So you can use them in the same way you'd use any other retirement savings. After 65, withdrawals will be considered taxable income, just as in a traditional IRA or 401(k) -- unless they are used for healthcare costs. The average 65-year-old couple can expect to spend $275,000 on healthcare expenses throughout their retirement, so there should be plenty of opportunities for HSA funds to be used completely tax-free in retirement.
In a nutshell, an HSA has some of the great retirement savings benefits of traditional IRAs or 401(k) accounts, but with the bonus of tax-deductible withdrawals if you need to use your money for medical expenses.
So if participants choose to use their HSA as a retirement savings vehicle, the proposed higher HSA contribution limits could allow them to significantly increase their tax-advantaged retirement savings while maintaining the flexibility to use their money for healthcare expenses if they need it sooner. And after retirement, participants can use HSA funds on a double-tax-advantaged basis to help cover their healthcare cost burden.
To be clear, you need to have a qualifying high-deductible health plan to be eligible to use an HSA to save. Specifically, you need to have a healthcare policy with a deductible of at least $1,350 for an individual or $2,700 for a family. Other HSA changes contained in the bills
It's also important to mention that the HSA bills that passed the House would do a whole lot more than raising the HSA contribution limits. Here's a rundown of some of the most significant changes they would make in their current form:
HSA funds could be used to purchase over-the-counter (OTC) medications and health products. Currently, this is not an option, and allowing HSA funds to be used for OTC products could help people save money. Individuals whose spouses are enrolled in a flexible spending account, but who otherwise qualify for an HSA, would be allowed to contribute to an account. Currently, doing so is prohibited. High-deductible health plans would be allowed to cover as much as $250 annually for an individual, or $500 for a family, for certain services on a pre-deductible basis.
What's next for the HSA bills?
These bills have only passed the House. They still need to clear the Senate before they can become law, and they're likely to face some significant resistance there. Many Senate Democrats aren't fans of the high-deductible health plans that HSAs are designed to complement, and the bills will need some degree of bipartisan support to pass.
Having said that, there is a lot in these bills that should make both sides of the political spectrum happy, so there's a realistic chance that they could make it through the Senate in the not too distant future and become law.
Is this a company sponsored or private HSA?.....................
got it thx
Those were the rules when I had to decide. A lot of people ended up scheduling medical operations they didn't really need rather than lose the money. Lasik surgery was a big winner.
These days, though, the numbers are a lot rougher, especially if you have dependents. If you're trying to get by on a low-premium Bronze plan and your coverage doesn't start until you're ten grand in the hole, then you'd better have ten grand stashed somewhere. I was reasonably frugal during my thirties but I don't recall having a lot of ten thousand dollarses lying around. How a family of four managed independent health care under 0bamacare I really can't imagine. And the IRS was waiting for them if they didn't.
You may be confusing Healthcare Savings Accounts with Healthcare Spending Accounts. The later is for use only on medical expenses in a given year, and if you don't use it then you lose it. Healthcare Savings Accounts balances can be carried over from year to year and you never lose them.
Exactly, plus if you start out young you need only contribute very small amounts and sit back and enjoy the miracle of compounding.
It's a loophole in a way. You fund it with tax deferred money, like a 401K (lowering your tax bill). Then you can either use the money for health care expenses OR invest it in options provided by the plan, again like a 401K. But unlike a 401K, if you ever use the money in the account for health expenses you don't pay tax on it. You do if you take it out for a vacation or something. But not for heathcare. I figure when I'm retired I'll need to spend money on healthcare so I'm funding my HSA now and investing the balance in some basic broad market stock and bond funds. When I'm retired, that's going to be where I pay my doctors from. And I have never paid and will never pay any tax on it if that's what I do.
There’s no carryover penalty on an HSA.
They’ve changed the rules since then—I ended up in the same place, but was able to get out. I spent every penny on “medical supplies,” and upgraded my first aid kits to full-scale medical kits for prepping. It’s worked out well, but it’s not necessary today.
This change looks really good to me since I’m looking at changing jobs and the new “benefits” has a high deductible. I’d like to build up a reserve, and/or have the deductions tax free...
Well, I suppose it’s really moot to me. I’ve been a contractor (in IT) for many years now and have had no health insurance since the day Obamacare went official in 1/1/2014. The one time since then we thought we were going to have a significant medical expense, prayer, followed by a miraculous healing ended it. :)
The trick is to use it with a high deductible health insurance plan (my company offers one with a $2500 deductible each year then 100% for everything over) pair that with an HSA to handle the deductible costs but I rarely go over half my annual contribution so I’ve built up enough to cover the deductible now for several years.
If I ever change jobs then I’ll still have that nest egg I can use for health care or out towards retirement.
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What happens to ‘retirement savings’ when all of the governments of this world have been crushed?
That is exactly what is going to happen immediately after the day of Trumpets in 2024.
Unfortunately, us Medicare recipients can no longer use HSAs.
I did not know that.
Should sue over Equal Protection Under the Laws.................
We won’t be needing them then...................
Thanks - bttt
“Unfortunately, us Medicare recipients can no longer use HSAs.”
You can draw down the accumulated funds in an existing HSA but you can’t contribute more money to it.
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