by Fred Adams
Vice President
HSA for America

Health Savings Accounts: A New Way to Defer Taxes


Most tax payers fail to take full advantage of the many opportunities to defer taxes on their current income.  In addition to reducing the immediate tax obligation, a tax-deferred investment can grow until retirement without being reduced by income taxes.  The resulting compounded growth can sometimes mean hundreds of thousands of additional dollars in the account by retirement age.  When taxes are paid on the money withdrawn during retirement, it is typically at a much lower tax rate.  With most of these investment options, you have until April 15, or your extension deadline, to fund your account.

Health Savings Account (HSA)

Health Savings Accounts are the latest way that you can shelter your income from taxes.  They can be opened by anyone with a qualifying high-deductible health insurance plan.  These plans are available through Blue Cross Blue Shield, Humana, Assurant, United Healthcare, and many other insurance companies.  For 2006 there is a contribution limit of $2,700 for individuals, and $5,450 for a family.  Any money deposited in the account is tax deductible, and grows tax-deferred.  The special advantage HSAs offer is that the money can be withdrawn from the account tax-free at any time to pay medical expenses.  It is for this reason that many financial advisors recommend that the HSA be the first of your tax-deferred accounts that you fully fund each year.

Individual Retirement Account (IRA)

Anyone with taxable income is eligible to open an IRA.  For 2004, you can put away $3,000 in your IRA.  If you are over 50, you can put away $3,500.  If you designate your IRA as a Roth IRA, you must fund the money with after-tax dollars, but you never have to pay taxes on the money when it is withdrawn.  Beginning in 2005, you'll be able to sock away $4,000 ($4,500 if you are over 50).

Simplified Employee Pension (SEP)

SEPs allow small business owners, independent contractors, and other self-employed individuals to place as much as 25% of their income into their SEP account, where it will not be taxed until it is withdrawn.  The maximum annual contribution is $41,000, giving a sole proprietor a significant opportunity to save for retirement on a tax deferred basis.

401(k)

Many employers offer 401(k) retirement accounts funded through pre-tax payroll deductions.  These plans allow you to contribute a percentage of your pay, typically between 1-20%.  Companies often match some of your contribution, and taxes on any contributions deferred, as long as the total going into the account does not exceed the limit for the year.  The maximum pre-tax contribution dollar amount allowed for 2005 is $14,000 or $18,000 if you are over 50.

Long-term Growth

All of these options except the Roth IRA will reduce your immediate income tax obligation.  But the biggest advantage may be that the funds are allowed to grow without being taxed each year.  This can dramatically increase your return.  For example, if you are in the 33% tax bracket, you would need a 15% return on a taxable bond to match a tax-deferred yield of only 10%.

Money withdrawn from a tax-deferred account is subject to taxes at the time of withdrawal, plus a 10% penalty if you are under age 65.  Health Savings Accounts, however, do allow you to take out funds any time to be used to pay for medical expenses, including medications, dental, eye glasses, alternative treatments, and other health related expenses.

More information about how HSAs work, along with instant quotes on qualifying high-deductible health plans, can be found at:

HSA for America

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Fort Collins, CO 80524
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