July 11, 2008, Newsletter Issue #136: Health Savings Accounts

Tip of the Week

Having a health savings accounts (HSA), sometimes incorrectly referred to as a health care savings account, is an alternative to traditional health insurance that works in conjunction with a high deductible health plan. They work in this way: Instead of paying huge premiums for health insurance coverage you may or may not use, you purchase a high deductible health plan (HDHP) at a lower premium. This results in savings from the beginning due to the reduced premium. The next step is to deposit the savings (up to federally preset maximums) into the HSA on a pre-tax basis. A married couple with two children with a gross income of $100,000 can reduce their federal income tax bill by $1,300. Therefore, when you need routine medical care, you can use the money in your HSA to pay it, tax-free. The other great feature of health savings accounts is that there is no "use it or lose it" component as is common with a medical or a flexible savings account. If you do not use the money deposited in your HSA during the calendar year it is deposited, it sits there until you need it earning interest on a tax-free basis. If you leave it in there until you are 65 or become disabled, you will be able to withdraw the funds tax-free regardless of what you use the money for. However, if you withdraw money from an HSA before you turn 65 and use it for other than qualified medical expenses, you must pay a 10% penalty.

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