Is Congress About to Supersize Your Health Savings Account?

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One proposal in the repeal and replace plans for Obamacare could give some families an overlooked way to dramatically boost retirement savings.

President Donald Trump and Republicans in Congress have the Affordable Care Act squarely in their sights, with plans to repeal and replace the landmark health care reform legislation passed in 2009.

A fierce debate rages about the wisdom of such a move. In addition, details about any replacement plan remain scanty.

But one intriguing proposal could provide a huge boost to your retirement savings efforts.

CNN Money reports that most proposed fixes to the law also known as Obamacare include a big increase in the amount individuals and families can contribute tax-free to their health savings accounts:

Several proposals — including the Better Way white paper authored by House Speaker Paul Ryan, would increase HSA contribution limits. Ryan’s plan would allow the tax-free contributions to total as much as the insurance plan’s annual deductible and out-of-pocket maximum. For families, that could be more than $14,000 a year.

In 2017, families can contribute a maximum of $6,750 to their HSAs. So, the Ryan proposal represents more than a doubling of the allowed contribution.

Meanwhile, Kentucky Sen. Rand Paul has proposed removing contribution limits altogether. In addition, Paul would end the requirement that you need to purchase a high-deductible health plan to be eligible to contribute to an HSA.

How an HSA can dramatically increase retirement savings

Health savings accounts themselves are controversial. Proponents say they are a great way to save for future health expenses. Not only are contributions to an HSA tax-free, but so are withdrawals as long as you use them to pay for qualified medical expenses.

Of course, it’s difficult to contribute to an HSA if you don’t earn enough money to do so. For that reason, critics have criticized HSAs as just another tax break for the rich.

Whatever your feelings about health savings accounts, an increase in HSA contributions potentially can add a lot of fuel to your retirement savings efforts.

Funding an HSA now — and investing your contributions in a low-cost stock market index mutual fund — can greatly increase your odds of covering medical costs in retirement.

Money in an HSA can be withdrawn tax-free at any time to pay for qualified medical expenses. But if you leave the money to grow and compound over years — or even decades — you can accumulate a large-sized nest egg for health care costs in retirement.

If you’re fortunate and have excellent health throughout your golden years, your HSA funds will not go to waste. Although relatively few people realize it, you can use funds in an HSA as a type of “secret” IRA. As U.S. News and World Report explains:

What you don’t use for medical expenses can be withdrawn during retirement (after age 65 or Medicare eligibility) with no penalty. But you will still need to pay income tax on the funds, just as you would with a traditional IRA distribution.

Unless a proposal similar to Paul’s plan passes, you will continue to be required to purchase a high-deductible health insurance plan if you want to contribute to an HSA. We have the scoop on how to make the most of this type of plan in our story “10 Tips to Maximize Your High-Deductible Health Plan.”

What do you think of the proposals to “supersize” HSA contributions? Let us know by commenting below or on our Facebook page.

Stacy Johnson

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