TOP DRAWER ARTICLE

Health Savings Accounts
by
HL Carpenter

Eat your vegetables. Get some exercise. Open a Health Savings Account. Okay, maybe your mom forgot to mention that last suggestion. Even so, it could be sound advice. Here’s why:

Health Savings Accounts (HSAs) are savings accounts you open in conjunction with the purchase of a high deductible health insurance plan. The idea is that you’ll set aside enough money in the savings account to pay your medical costs until the insurance kicks in.

Why bother? Because HSAs have plenty of tax benefits.

You might think of HSAs in the same way as Individual Retirement Accounts (IRAs). Like an IRA, money you put into your Health Savings Account is tax deductible above the line, meaning you can realize a tax benefit without having to itemize.

In addition, your contribution can be invested and grow tax deferred. Earnings, as well as contributions, are not taxed when withdrawn, as long as you use the cash for medical expenses.

There’s more. With certain limitations, HSAs are available for almost anyone. If you’re over 55, you can make extra contributions. Even better, the account belongs to you. That means if you open an account through your employer, you can take the money with you when you change jobs. You’re also free to leave unspent funds in the account instead of having to zero it out before year end.

Of course, the accounts have potential disadvantages you’ll want to give some thought to. For one, a high deductible insurance policy might leave you exposed to risk if you’re unable to immediately fund your HSA with enough to cover the deductible.

For another, you may be less willing to spend the money in your account, which could lead to fewer preventive tests, potentially longer illnesses and more expensive medical procedures.

A third consideration: If you need to use the cash in your HSA for non-medical reasons, you’ll be subject to taxes as well as a 10% penalty on the withdrawal.

Making the decision to open a health savings account requires more deliberation than choosing to eat your vegetables and exercise. But this tax deductible method of saving for health care bills might be just what the doctor – and your mother - ordered.

Originally published November 2004.

Last update: January 8, 2011