Health Savings Accounts (HSAs) have suffered under the complex regulations meant to discourage misuse. However, the accounts have potential to do more than simply allow investors to save and pay for health-care expenses with tax-free dollars. They offer a potential way for individuals to bridge gaps in health insurance coverage that may evolve during times of unemployment or in retirement.
The Medicare Modernization Act of 2003 created HSAs. Anyone younger than 65 can open an HSA after buying a qualified high-deductible health insurance plan. An individual could maintain an HSA and be covered under other insurance policies, as long as that person doesn’t “double dip” and have medical expenses paid by both insurance and the Health Savings Accounts.
To be considered “qualified” the insurance plan has to have a deductible of at least $1,150 for individuals or $2,300 for family, and obtain a limit of $5,800 individual and $11,600 family for out-of-pocket costs. Choosing a policy that qualifies can involve insurance and tax issues that should be discussed with experts in those fields.
Contribution caps are the lesser of the insurance plan deductible or the IRS maximum. For 2009, the IRS max is $3,000 for individuals and $5,950 for families. Individuals 55 or older can make a $1000 catch-up contribution in 2006.
Because you establish an HSA independent of your employer, these accounts can provide a health care cost “safety net” should you end employment (voluntarily or involuntarily). They also provide retirees with another investment vehicle that allows tax deductions for contributions, tax-free growth and tax-free withdrawals for medical expenses. Withdrawals for non-medical expenses after age 65 are still taxable, and a 10% penalty applies for non-medical withdrawals before age 65.
If you’re thinking about using Health Savings Account funds in the near term, a liquid, interest-bearing account such as a savings account might be appropriate. However, if you don’t anticipate an immediate need for all or part of your HSA funds, the accounts are self-directed, allowing you to use other investment options. Your financial professional can assist you determine which investment vehicle best meets your needs.
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