by Cindy Hockenberry
National Association of Tax Professionals - Information Coordinator
As seen on the The Post-Crescent

Health Savings Accounts Usually a Smart Choice

Face it, health care reform and cost containment is far off on the horizon.  We all need to do something now to ensure we can continue to afford medical care in the future.  A smart choice is to open a health savings account.

A health savings account (HSA) works very much like an IRA, except that the money you contribute is used to pay health care costs.  Participants must enroll in a relatively inexpensive high-deductible health insurance plan to qualify.  Then, a tax-deductible savings account may be opened to cover current and future medical expenses.  The money deposited, as well as the earnings, is tax-deferred.  The money can be withdrawn as needed to cover qualified medical expenses tax-free.  Unused balances in HSAs roll over from year to year.

For 2004, a high deductible insurance plan is a health plan with a minimum deductible of $1,000 for self-only coverage and $2,000 for family coverage.  The maximum out-of-pocket expenses for qualifying expenses must be no more than $5,000 for self-only coverage and no more than $10,000 for family.  Annual contribution limits for you or any other person depends on the type of coverage you have and your age.

For 2004, if you have self-only coverage, you can contribute up to the amount of your annual health plan deductible, but not more than $2,600.  If you have family coverage, you can contribute up to the amount of your annual health plan deductible, but not more than $5,150.

Here’s how it works: You obtain coverage under a qualified high-deductible health insurance plan.  Each year, you deposit the money you saved by paying lower premiums into the tax-favored HSA.  You use the savings account to pay for your deductible with tax-free dollars.  Once you meet the deductible amount, the insurance starts paying for your medical expenses.  Any money left over at the end of the year is yours for next year.

As an added incentive, individuals between ages 55 and 65 are eligible for catch-up contributions.  Once reaching age 65, individuals must cease contributing to an HSA.  The catch-up contribution limit for 2004 is $500.  For example, if you have self-only coverage, you can contribute up to the amount of your annual health plan deductible plus $500, but not more than $3,100.  The catch-up contribution limit increases to $600 in 2005.

An HSA coupled with a high-deductible insurance plan is a smart choice.  Do the math — it may surprise you.

Cindy Hockenberry is an enrolled agent and tax information analyst with National Association of Tax Professionals.

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