There’s new help from Washington to cover the costs of health
care: Health Savings Accounts (HSAs), which were included in the
Medicare Act of 2003. HSAs are similar to IRAs, but they also have
some unique features. You can make a tax-deductible contribution
for 2004 of up to $2,600 to an individual HSA or $5,150 to a family
HSA. If you’re 55 or older, your annual contribution can be $500
higher. If your employer makes the contribution as part of a
cafeteria benefits plan, it isn’t taxable to you. Earnings on
investments made with your contributions won’t be taxed currently
and withdrawals are also tax-free if they are used for a broad
range of medical expenses.
There’s new help from Washington to cover the costs of health care: Health Savings Accounts (HSAs), which were included in the Medicare Act of 2003. HSAs are similar to IRAs, but they also have some unique features. You can make a tax-deductible contribution for 2004 of up to $2,600 to an individual HSA or $5,150 to a family HSA. If you’re 55 or older, your annual contribution can be $500 higher. If your employer makes the contribution as part of a cafeteria benefits plan, it isn’t taxable to you. Earnings on investments made with your contributions won’t be taxed currently and withdrawals are also tax-free if they are used for a broad range of medical expenses.
Of course, there are restrictions. To be eligible for an HSA, you must be covered by a health plan with a deductible of at least $1,000 annually for an individual or $2,000 annually for a family. These “high deductible” health plans can save you money, since they should have lower premiums. You must be under 65, and therefore not eligible for Medicare, when opening an HSA. Your contribution can’t be greater than the deductible on your insurance, nor can you be covered by another plan with a lower deductible for the same benefits. If you withdraw HSA funds for non-health expenses, you’ll pay taxes, plus be subject to a penalty if you do it before age 65. Some other conditions also apply.
You should consider an HSA if you’re interested in building a nest egg to cover future health care costs, as an alternative to a flexible health care spending account, or if you’re willing to exchange lower premiums for higher deductibles.
