A Health Savings Account is a tax-sheltered savings account similar to an IRA, but earmarked for medical expenses. Anyone under the age of 65 who buys a qualified high-deductible policy can open and contribute to a Health Savings Account. Deposits are 100% tax-deductible (even if you don’t itemize) and can be easily withdrawn to pay routine medical bills with tax-free dollars. And unlike an IRA, there aren’t any income limits regarding participation in this account. We suggest you consult your tax advisor regarding tax advantages of a HSA. What is not used from your Health Savings Account each year stays in the account and continues to earn interest on a tax-favored basis to supplement retirement, just like an IRA— in fact you can think of it as a medical IRA.
When combined with a low-cost, high deductible health insurance policy ( which is required), the HSA is meant to replace a traditional high-cost health insurance policy (with its low co-pays and mountains of restrictions on medical choices).
A health savings plan restores a high degree of freedom of choice by allowing you to choose your own physician (typically from an extensive PPO directory) without the extensive restrictions imposed by HMO-type plans.
With a HSA, you can take the money you had spent on a high cost traditional health care plan and split it between a lower cost, higher deductible policy and your HSA. Your HSA can then be used to pay for smaller covered medical expenses until the deductible is met. The high deductible insurance policy can then take care of covered medical expenses exceeding the deductible.
Contributions can be made by either the HSA owner or by the HSA owner's employer. Assuming th owner meets all of the eligibility requirments on the first day of a month, the contribution is 1/12th of either the annual deductible under the HDHP coverage, or the annual contribution limit, whichever is less. For tax years 2005 and 2006, here are the annual contributions:
Tax
YearSingle Coverage
Annual LimitFamily Coverage
Annual Limit2006 $2,700 $5,450 2007 $2,850 $5,650 If you are at least age 55 by the end of th eyear for which the contribution is made, you can make "catch-up" contributions. This contribution is 1/12th of the amount shown below, and catch-up contributions are in addition to the monthly limit listed above. These additional contribution amounts are fixed and scheduled to increase by $100 per year through tax year 2009.
Tax
YearCatch-Up Contribution 2006 $700 2007 $800 Unlike contribution to a flexible spending account, the balance of your HSA at the end of the year is carried over to the next year. So you're not placed in a position to "use it or lose it" each year.
And a HSA offers you portability. Since you own the account, it goes where you go, regardless of any job changes.
To obtain additional information regarding Health Savings Accounts, go to the Department of the Treasury and search on Health Savings Accounts.
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