Saving for retirement is easier if you take advantage of tax breaks the government provides for doing it. But the retirement investment account that provides the most valuable tax savings has historically been available only to a limited number of people. The good news is, that could change for 2020 -- and potentially beyond -- if Congress takes action.
Will this valuable retirement savings account become available for everyone in 2020?
First things first -- the most valuable retirement savings account is actually not called a retirement savings account at all. It's a health savings account or HSA.
HSAs, while they have a relatively low contribution limit, provide better tax benefits than either 401(k)s or IRAs, because you can invest with pre-tax dollars and you can benefit from tax-free withdrawals, provided the money is used for healthcare expenses. Other retirement savings accounts, including 401(k)s, traditional IRAs, and Roth IRAs, require you to choose either up-front tax savings or tax-free withdrawals, but not both.
HSAs are intended to help you cover substantial healthcare expenses with pre-tax dollars, but what makes them a great retirement savings account is that your money can grow tax-free in the account for as long as you want. When you're a senior and incur significant health expenses, you can pay for them with HSA funds. You also have the option to make penalty-free withdrawals from HSAs once you've reached the age of 65, so if you don't end up needing that much care, you can still use your money. You will, however, be taxed at your ordinary rate (just like on 401(k) or traditional IRA distributions) if you aren't using the withdrawn money for medical services.
The downside of HSAs, however, is that not everyone can invest in them. You need to have a qualifying high-deductible health plan to do so. But that could change for this year, as a bill has been introduced to waive this requirement during the coronavirus emergency period. That period began March 13, 2020, and would end when the federal emergency declarations related to COVID-19 are lifted.
If the bill were to pass, anyone with any type of health insurance could be made eligible to make HSA contributions up until the tax deadline for the year in which the coronavirus emergency declaration remains in effect. That would open up the door to many more people putting money into an HSA -- at least for this year, and potentially for next year too if the coronavirus crisis continues.
Should you invest in an HSA for retirement?
However, while this legislation has been introduced, there's no guarantee it will pass and be signed into law. So if you are not eligible to contribute to an HSA under the current rules, you'll need to watch the legislation carefully -- and should consider contacting your representatives if you support it to let them know.
If the bill does pass, it's a good idea to max out your investments for this year and any year in which you're eligible to contribute. For 2020, that would mean contributing up to the limit of $3,550 if you have individual coverage or $7,100 if you have a family insurance plan. Those who are 50-and-over would also be eligible for an additional $1,000 catch up contribution.
It's also worth noting that many people who are already eligible to contribute to a health savings account are not doing so -- and that's a major missed opportunity. If your health insurance plan qualifies you to put money into an HSA, you don't have to wait for lawmakers to take action. Start investing in an HSA ASAP. Leave the money to grow so that when you reach retirement age, you'll have a generous nest egg earmarked for your healthcare needs. This will give you a lot more financial security in the end.