Pros and Cons of Health Savings Accounts

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Should I open a health savings account?

Pros and Cons of Health Savings Accounts

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.



3/24/2007 8:32:15 PM
kurt said:

ok, that listed all the pros... what about the cons? And why would I even base HEALTH desicions based on a tax shelter? Uhm, this is our families lives we are talking about here. Perhaps in 10-20 years after all of the scams from HSA's are uncovered I'll think about it. Until then I'm going to put my money into REAL HEALTH INSURANCE

5/21/2007 2:07:55 PM
Jeff said:

I believe, after age 65 you can use the money in an HSA for unqualified uses without the 10% penalty, but you still have to pay taxes on it. It's tax deferred, not tax free.

6/23/2007 7:24:35 PM
Mike said:

Can you really take the money out after age 59 and not pay taxes? I haven't seen this before.

8/13/2007 12:12:15 PM
Baba Ghanoush said:

The article states:

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.

I believe this is incorrect. After age 65, you no longer pay an additional 10% penalty for non-medical uses, but you still have to pay taxes.

11/8/2007 5:43:07 PM
Chris said:

Straight forward answer!

12/19/2007 1:46:21 PM
Ed Mink said:

Somebody should read the rules before posting this information. Age 59 is irrelevant for HSAs.
Withdrawals are never tax-free unless used for medical expenses. Withdrawals after age 65 are penalty-free.

10/8/2009 2:08:08 PM
anonymous said:

I believe the age at which you can withdraw funds from an HSA and not pay a 10% penalty is 65, not 59. Also, you can never withdraw funds for non-medical expenses without paying income tax on those withdrawn funds, no matter how old you get.


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