TAXES&FINANCE: Health savings accounts, plan now, pay later

By Jim Angell, The Willets News, April 2006

Health Savings Accounts (HSA) provide taxpayers with a tax-favored method to help offset rising health care expensesand with some planning they could help individuals save for retirement to boot.

Here are the basics. You can make annual, tax-deductible contributions to an HSA and withdraw the funds at any timetax-freeto pay for qualified medical expenses. Unused amounts stay in the fund and earn tax-free income. After age 65, you may begin withdrawing funds for any purpose without penalty, not just for medical expenses. Keep in mind that non-medical related withdrawals are taxable, much like IRAs. In effect, the HSA becomes yet another way to save for retirement.

Sound too good to be true? Well, there are a few catches. You must be under 65 and have a health insurance policy that meets certain criteria to qualify for an HSA. The policy must have an annual deductible of $1,050 or more ($2,100 for families). The deductible amount also serves as the upper limit for contributions to an HSA, with a maximum of $2,700 for singles and $5,450 for families. Those 55 or older can contribute $700 more than the deductible.

Also, the insurance policy must limit your annual out-of-pocket costs to $5,250 ($10,500 for families). Because of these restrictions, HSAs are most effective when the employer and employee work together to develop a plan. This makes an HSA especially attractive to the one-employee business owner.

Retirement and health care costs call for single-minded determination and planning. The Health Savings Account might be an important tool in your financial plan. Give us a call to see if an HSA is right for you.