There's a new way to cover your
health costs which also offers tremendous tax advantages: The
Health Savings Account, or "HSA". It was included in the massive
Medicare legislation signed by President Bush in early December.
An HSA offers significant advantages over the so-called "Archer
Medical Savings Account," created to help small businesses a few
years ago. But HSAs also have applications for larger companies
-- and their employees.
With an HSA, employees -- and their employers, if they choose --
contribute pre-tax dollars to an account earmarked for
out-of-pocket health expenses. But according to Jay Nawrocki, a
health law analyst at the tax information firm CCH, "The real
advantage is the tax shelter these accounts provide."
That's because in addition to not paying any tax on your
contributions, you also pay no tax on the earnings that
accumulate in your Health Savings Account. Moreover, money not
withdrawn to pay for medical care is carried over to the next
year and can continue growing tax-deferred.
And, provided you use it for health-related expenses or to pay
health insurance premiums, you pay [no tax] when you withdraw
money, either. Furthermore, these accounts are completely
portable and can move from job to job and even continue when you
retire.
You can put a significant amount of money into an HSA -- up to
$2,600 a year for a plan that only covers an individual and up
to $5,150 for a family plan. There are even "catch-up"
contributions for folks nearing retirement. Your money is
typically invested in mutual funds.
Depending upon your age, family status, health, and whether your
employer also made contributions, you could amass a substantial
amount of money in an HSA in just a few years. The fact that you
can maintain these accounts even after you leave your job means
people can essentially pre-fund their retirement medical
expenses before they retire. And do so completely tax-free.
Now here's the downside: not everyone is eligible for a Health
Savings Account. In order to qualify, you can only be covered by
a high-deductible medical insurance policy, either through your
employer or one you purchase yourself as a self-employed person.
"High-deductible" means the policy must not kick in until you
have accumulated at least $1,000 worth of out-of-pocket medical
expenses that year. The family deductible must be at least
$2,000.
Each year, you are allowed to contribute as much as 100 percent
of your deductible (again, up to a max. of $2,600 for an
individual-only policy and $5,150 for a family policy) to your
HSA. Employers are also allowed to contribute to their
employees' account.
So including the catch-up contribution, someone age 55 with a
family policy could conceivably contribute as much as $5,650 to
their HSA account this year -- far more than they could
contribute to an IRA, which may or may not be deductible and is
always taxable- either when you make your contribution or when
you make a withdrawal. Again, any money not used would be left
in the account to grow tax-free.
This is even better than a Roth IRA because contributions to an
HSA are made on a pre-tax basis and there are no income limits
restricting who can take advantage of them!
Health Savings Accounts were designed to help employers reduce
the sky-rocketing cost of employee health insurance. Obviously,
the bigger the deductible a policy requires, the less expensive
it's going to be. In addition to helping larger companies that
already offer health insurance, HSAs might make it possible for
small businesses, which often don't offer
any type of health insurance to at least provide some coverage.
While employees would still be responsible for doctor visits and
prescription medicines, they would have help paying for any
major medical bills which could arise if surgery or
hospitalization became necessary.
You can even withdraw money form an HSAs even if you don't use
it for medical expenses. If you're under age 55, there is a 10%
penalty and ordinary income tax; at age 65 and older all you
would pay is ordinary income tax.
Clearly, HSAs would not be available to anyone who has decent
health insurance through work because their deductible is too
low. And, says Nawrocki, they're not a good idea for people who
expect to incur significant medical expenses over the next year
such as young families and individuals who are planning to
become pregnant. That's because these anticipated expenses will
use up the full amount of the deductible -- and the real
advantage of these accounts comes from leaving as much money in
them as possible in order to take full advantage of potential
tax-free compounding. They're also not a good deal for people
who can't afford the monthly contributions to an HSA.
But these accounts are a potential gold mine for, say, healthy
folks who are young and earning enough to max out their
contributions each year. Don't be surprised if during next
year's benefits enrollment period your employer gives you the
option of opting OUT of the company's standard health insurance
plan. If you choose the high-deductible Health Savings
Account option instead, you could potentially sock away a bundle
-- tax-free.
If you're interested in learning more about Health Savings
Accounts, contact your financial advisor or insurance agent.
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HSA's are Good News
HSA Overview
HSA Tax Shelter |
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