Health Savings Account: Why Not Invest?

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Just when you think you've got your budget in place for the next month or two, something happens: those good old unexpected medical costs. People often have routine office visits and suddenly learn their visit is not so routine after all.

Like it or not, we all need to budget for our healthcare costs because none of us can predict when a routine medical or dental visit might result in several follow-up visits, tests and/or surgery. Insurance only covers so much and things like medication, extra equipment and, in some cases, the assistance of medical professionals can still take a big bite out of your budget. So how do you properly plan for illness or injury and related financial costs when you do not want to think about them, much less envision yourself or your family suffering from them? A Health Savings Account or HSA.

What is an HSA? An HSA enables you to pay for current health expenses and save for future qualified medical and retiree health expenses on a tax-free basis. In order to participate in a HSA, you must be covered by a High Deductible Health Plan which generally costs less than traditional health care coverage, so the money saved on insurance can be put into the HSA.

How and where can I open an HSA? You can open it on your own, or if offered, you can open an account through your employer.

What is the difference between the new HSAs and traditional flexible-spending accounts? The biggest and most important difference is that your HSA balances can roll over from year to year and continue to grow tax-deferred. Money in your flex plan must be spent by the end of the plan year or you lose it. Also, you can open a flexible-spending account only if the plan is offered by your employer, and you do not need to have a high-deductible health insurance policy. Note: if your employer offers both plans, you can only participate in one.

If I set up an HSA through my employer, what happens if I switch jobs? You can keep the money in an HSA account even after you leave that job, similar to a 401(k). But you will pay a 10% penalty, plus an income-tax bill if you use any of the money for non-medical expenses before age 65.

What happens if I want to withdraw the money for non-medical expenses after age 65? You will not have the 10% penalty if you use the money for non-medical expenses after age 65, but you would still have to pay income taxes on the money.

Can a couple who is planning to retire early open an HSA? Sure. Anyone under age 65 can contribute to an HSA if he or she buys a high-deductible health insurance policy. You cannot make new HSA contributions after age 65, but you can still use the money in your account tax-free for medical expenses at any age.

Do contributions to an HSA in any way affect one's ability to contribute to an individual retirement account? No. Your HSA contributions will not affect your IRA limits-$4,000 per year or $4,500 for those over 50.

So, why join? One of the primary benefits to investing in an HSA is that you own and control your money. Decisions on how to spend the money are made by you without relying on a third party or a health insurer. You will also decide what types of investments to make with the money in the account in order to make it grow. The funds in the health savings account grow tax-deferred and can be invested in money market, bond or even stock investment vehicles. The money in the HSA can be used to pay for qualified medical expenses, such as the health plan's deductible and over-the-counter medicines, without tax consequences.

Who can get an HSA? Anyone under age 65 who buys a qualified high-deductible policy can open an HSA. You cannot be covered by another health insurance policy that is not a qualified high-deductible plan (either as an individual or a dependent), although you can still have other disability, dental, vision and long-term care insurance policies.

How much can I contribute annually to an HSA? This year (2007), you can contribute up to $2,850 for individual coverage or $5,650 for families.

Can any high-deductible health insurance policy qualify for an HSA? Yes. Any high-deductible health insurance policy can qualify, as long as it meets the IRS requirements. The deductible must be at least $1,050 for individuals or $2,100 for families and the annual out-of-pocket expenses cannot exceed $5,250 for an individual or $10,500 for a family, including the deductible and co-payments (but not premiums).

What's the bottom line? We all have to take personal responsibility to save for future medical needs. By doing this we can continue to take informed steps to help reduce rising health care costs and increase the efficiency of the health-care system. For more information on Health Savings Accounts contact the National Caucus and Center on Black Aged at 202-637-8400 or visit www.ncba-aged.org.

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