December 28, 2007, Newsletter Issue #96: Pros and Cons of Health Savings Accounts

Tip of the Week

Health savings accounts (HSA) are relatively new on the tax planning scene. Introduced in late 2004, the intended purpose of a health savings account is to save overburdened consumers money on premiums. For a health savings account to work, you need to have a high deductible health plan (HDHP). HDHPs generally have deductibles of at least $1,000 for individuals and $2,500 for families. In essence, the HDHP really only covers catastrophic care. In exchange for the high deductibles, you get lower premiums. You take the money you are saving on your premiums and deposit it on a pre-tax basis into an HSA. That cuts your income tax bill by lowering your adjusted gross income. Then, you use the money in the HSA to pay upfront for usual medical expenses. Some HSAs offer a debit card that you can use to pay for qualified expenses at the point of service. Others require you to submit receipts for reimbursement. But wait! It gets better. HSAs are not “use it or lose it” accounts like dependent care or medical flexible spending accounts. If you don't use all the money in your HSA, it sits there indefinitely earning interest on a tax-free basis. You can use the money tax-free any time to pay for medical expenses. And if you wait until after age 59, you can take the money out for any purpose and not have to pay taxes on it. So, while HSAs are supposed to be helping the average Joe, skeptics view them as a tax shelter for wealthy Americans. That's because they can be used as an alternative retirement and estate tax planning tool for individuals who have maxed out the limits on their existing retirement plans. Whether you need a tax shelter or a break on health care insurance premiums, the truth is an HSA could save your family big bucks now and in the future on your income tax return. For more information, read IRS publication 969.

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