Health Savings Account: How You Can Save Money with and Profit from It

The Health Savings Account (HSA) by definition, according to the Treasury Department, “is an alternative to traditional health insurance; it is a savings product that offers a different way for consumers to pay for their health care.” And it is created to help you “pay for current health expenses and save for future qualified medical and retiree health expenses on a tax-free basis.” That is, the HSA allows you to set side certain amount of pre-tax money (if your employer participates in HSAs, otherwise you can deduct the money) each year so you can use the money to pay for the medical expenses that are currently not covered by your insurance plan or during retirement. To qualify for a HSA contribution, however, you must have a High Deductible Health Plan (HDHP) which has the following deductible limits:

• Self-only coverage: $1,100
• Family coverage: $2,200

If you meet the above limits, you are eligible for a HSA and can make annual contribution that doesn’t exceed the health insurance deductible. Since the contribution in HSA is tax deductible, participating in HSA can save you money on taxes by reducing your taxable income by the same amount. What’s more, the contributions in HSA can be invested in the same way as you make IRA investments into stocks, bonds, mutual funds, and CDs. Therefore, if you can select a HDHP and contribute the annual limit into a HSA without really using it (i.e., you still pay the medical expenses out of your pocket and let the money in HSA grow tax-deferred), it will be “a tax-free way to help you build savings for future medical expenses.” Last Friday, a Reuters article outlined several ways to get the most from a HSA:

• Load it to the max. For 2007, you’re allowed to put away as much as $2,850 for single coverage or $5,650 for family coverage in your HSA account, even if your policy’s deductible is less than that.
• Invest it. Treat the money in your HSA as a long-term investment.
• Pay out of pocket for your health-care costs and don’t use the HSA money unless you absolutely must so you can build a HSA nest egg for retirement when you need it the most.
• Push your employer a little. See if your employer can offer HSAs by simply moving money from existing Flexible Spending Account or Health Reimbursement Accounts into an HSA.
• Make a full contribution in your first year. Even if you establish a HSA late in the year, you can still make the full deduction.
• Pass on the IRA transfer. You can one-time transfer from the IRA to an HSA, up to the maximum HSA contribution for that year.

For more information (eligibility, limits, penalty, ect) on HSA, click here and HSAInsider is a place to find the providers in your area.

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*Photo from Rimato & Association.

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