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Investing Smart in a Health Savings Account
Last year, new provisions went into effect on Health Savings
Accounts (HSAs) that not only give individuals a better nest egg
for serious health situations, but a nest egg that can serve
them in other ways as well.
Now that the rules allow people to contribute more than their
deductible, you can start to use HSAs for greater long-term
savings. You can contribute pretax money to the account, where
it grows tax-deferred and can then be used tax-free for medical
expenses. That's a triple tax benefit.
More companies are letting individuals and families invest
HSA money into mutual funds or directly into stocks, and over
time, banks and investment firms are expected to enter the HSA
business.
Here's a basic overview of HSAs and how you might get the
most out of them:
The basics. Health savings accounts were created as
part of the Medicare Modernization Act of 2003. Anyone under age
65 who buys a qualified high-deductible health plan (HDHP) can
open an HSA. However, you can still own an HSA and be covered
under other types of insurance policies that cover liability,
dental, vision and long-term care needs.
How do I find a qualified policy? If you're employed,
your employer obviously selects a qualified option and makes
that available to you. However, for individuals or sole
proprietors buying such policies, you need to put in some search
time since HSAs haven't gotten much of a marketing push.
Obviously, ask if your current insurer has a qualified plan, and
there are websites you can search for ideas, such as www.hsainsider.com.
What are the 2008 HSA limits? The following cover the
maximum contributions you can place in an HSA and the minimum
and maximum deductibles for an HDHP insurance plan:
- Maximum HSA
contribution: $2900 for individual, $5800 for families
- Minimum HDHP
deductible: $1100 self-only coverage, $2200 family coverage*
- Annual
out-of-pocket maximum: $5600 self-only coverage, $11200
family coverage
- If you are 55 or
older and your HDHP is in effect, you are eligible to
deposit catch-up contributions, and in 2008, the additional
amount is $900.
If I find a policy, should I automatically buy it? No.
Since this is a tax issue as well as an insurance issue, it
makes sense to discuss this decision with your tax or financial
advisor, such as a Certified Financial Planner ™ professional.
What's the difference between an HSA and a medical
flexible spending account (FSA)? One important difference is
that HSAs allow balances to be rolled over from year-to-year,
growing on a tax-free basis as long as they're used for medical
expenses. On the other hand, medical FSAs require that the money
you contribute each year has to be spent by year-end (or a brief
grace period if provided by the plan) or you'll lose it. But in
certain cases, such as when you incur medical expenses early in
a year, you can be reimbursed by your FSA without having to
fully fund it — so FSAs might be a bit more flexible in this
regard. Get help from your tax or human resources professional.
Can I have both an HSA and a flexible spending account?
It depends. If your FSA provides for limited reimbursement for
items not covered by your health insurance plan (such as dental,
vision, or wellness care), you can use an HSA for items covered
by your plan and your FSA for medical expenses that are not.
Obviously, double-check this with an expert.
What happens if I need to use my HSA dollars for any
non-medical reason before age 65? You'll get hit with a 10
percent penalty, plus any withdrawals will be taxed at ordinary
income tax rates. After age 65, you're free to use the funds for
any purpose without penalty, but non-medical withdrawals are
still taxable.
Can I use my IRAs to fund an HSA? Yes, on a one-time
basis. The new rules let individuals roll over money from an IRA
once so people can use the money tax-free for medical expenses,
but the amount of the rollover is limited to the HSA maximum
contribution for the year minus any contributions already made.
February 2008 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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