In 2003, Health Savings Accounts (HSAs) came into effect. They were launched to heavy acclaim, and aggressively promoted in the early stages. Yet five years later, many people still aren't as informed as they should be about Health Savings Accounts and how they work.
As part of the Medicare Prescription Drug, Improvement and Modernization Act, Health Savings Accounts help US citizens under 65 save money for qualified medical expenses on a tax-advantaged basis. People who purchase a qualified High Deductible Health Plan may open a Health Savings Account.
The tax benefits you can accrue with HSAs are:
Deposits and earnings aren't taxed.
There is no "use it or lose it" qualifier.
Money you save in the account isn't taxed upon withdrawal if you use the money for qualified health expenses.
HSAs are owned solely by the individual, giving them portability not associated with other health insurance plans. If you have an HSA with an employer and you leave that company, the money you have saved in the HSA is still yours. Many people confuse Medical Savings Accounts (MSA's) that are employer owned with Health Savings Accounts owned by the individual employees.
Since HSA's are owned by an individual, they are totally flexible. Of course, you must have a Qualified High Deductible Health Plan (HDHP) in force when you want to make any deposits. Many people who have HDHP never open an HSA. But when they do, they can deposit as little or as much as they want up to the limits set by the IRS. If you're looking for flexibility in terms of payments, then a Health Savings Account might just suit your budget.
The second way to contribute to a health savings plan is through non-taxable employer contributions. Additionally, employers with cafeteria plans may allow workers to contribute untaxed salary through a reduction in salary.
Similar to an IRA, those 55 or older can make catch-up contributions to their HSA. Funds in the account grow tax-free, and deductions are tax-free as well, as long as the money is withdrawn for qualified medical expenses.
When you turn 65 you can withdraw the money for any purpose and it will be taxed as regular income. But, if after you are 65 years old, and you use the money in your HSA for medical expenses, you can withdraw the money and not be taxed.
Because of their flexibility HSAs can be a very handy tool. They're well worth considering for protecting yourself when you most need it. So if you don't have health insurance and need it, take a look at a HDHP and then supplement it with a health savings account. Find out if this is the perfect coverage for you by talking to a qualified health insurance broker who can guide you through the process.
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