Health Savings Accounts (HSAs)

Health Savings Accounts (HSAs) have become increasingly popular over the last few years. Opening one up is the ultimate expression of taking responsibility for your own healthcare costs instead of relying on an employer or the government.

Plus, HSAs have tax advantages. For 2011, you can make a deductible HSA contribution of up to $3,050 if you have qualifying self-only high-deductible health coverage or up to $6,150 if you have qualifying family high-deductible coverage. The contribution ceiling is increased by $1,000 if you are age 55 or older as of year-end. However, no contribution is allowed after you reach the Medicare eligibility age—currently age 65.

Deductions are not phased out for those with high incomes, and you don’t have to itemize to benefit. However, you must have a qualifying high-deductible health insurance policy (and no other general health coverage) to be eligible for the tax-saving HSA contribution privilege. For 2011, a high-deductible policy is defined as one with a deductible of at least $1,200 for self-only coverage or $2,400 for family coverage. For 2011, qualifying policies can have out-of-pocket limits of up to $5,950 for self-only coverage or $11,900 for family coverage.

The HSA earnings are allowed to build up federal-income-tax-free. You can then take federal-income-tax-free HSA withdrawals to cover most out-of-pocket medical costs, even after you reach the Medicare eligibility age. However, if you can afford it, it is better to leave the HSA balance untouched. That way, you can build up a substantial tax-free reserve for future medical expenses.

If you take money out of your HSA for any reason other than to cover qualified medical expenses, you will generally owe federal income tax plus a 20% nonqualified withdrawal penalty tax. However, the 20% penalty tax does not apply after you reach the Medicare eligibility age.

Please contact us if you have questions or want more information about tax-saving HSAs.