A health savings account is a tax-sheltered
savings account similar to the IRA, but earmarked for medical expenses.
Deposits are 100% tax-deductible for the self-employed (and now almost
everyone with the HSA) and can be easily withdrawn by check or debit card to
pay routine medical bills with tax-free dollars. Larger medical expenses
are covered by a
low-cost, high deductible
health insurance policy (HDHP). What is not used from the account each
year stays in the account and continues to grow interest on a tax-favored
basis to supplement retirement, just like an IRA.
When combined with a low-cost, high deductible
health insurance policy (required), the health savings account is meant to
replace a traditional high-cost health insurance policy (with its low
co-pays and mountains of restrictions on medical choices). A health savings
plan will restore a high degree of freedom of choice by allowing you to
choose your own physician (typically from an extensive PPO directory)
without the extensive restrictions imposed by HMO-type plans.
Here's how it works, in a nutshell. Take the
money currently spent on a high cost traditional health plan and split it
like this: Put a portion towards a low cost higher deductible policy and
deposit the balance into a tax-deductible HSA. The savings accounts should
be used to help pay smaller covered medical expenses until the deductible is
met; should the need arise, the high deductible insurance policy takes care
of covered medical expenses exceeding the deductible.
Who is Eligible?
-
Any individual that is covered by an HDHP and:
-
Is not covered by other health insurance that is
not HDHP (i.e., low-deductible insurance)
-
Is not enrolled in Medicare
-
Can’t be claimed as a dependent on someone else’s
tax return
-
Children cannot establish their own HSAs
What if I don't qualify?
If you do not federally qualify, you or your employer can still start an
HSA with a high-deductible health plan. The reduction in insurance premiums
can be used to fund your HSA. These non-federally qualified HSAs may qualify
for state tax deductions. Check with your local state tax commissioner for
HSA legislation that applies in your state.
Eligibility to contribute to an HSA does not depend on:
-
Your income (no limits)
-
Earned income (don’t have to be working)
-
Who is the primary policy holder (Spouses can
establish their own HSAs, if eligible)
-
Insurance coverage of your children
See the Department of the U.S Treasury "All
About HSAs" for complete information about contributions, restrictions
and explanations.
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