Planner's pulpit
HSAs Have Several Advantages
Posted on February 22, 2008 by Rev. John F. Harrison, CFP®
The upcoming presidential election has a number of candidates talking about health insurance reform and universal coverage. Massachusetts recently made it mandatory for most people to purchase health insurance. As small business owners and self-employed people know, health insurance isn't cheap. Some people could benefit from choosing a high-deductible plan to keep their costs in line.
Enter the HSA. HSA stands for Health Savings Account. Individuals with a high-deductible health plan (defined as a deductible of at least $1100 per individual or $2200 per family in 2008) are eligible to open an HSA, and can contribute up to $2900 for individual coverage, or $5800 for family coverage. Additional catch-up contributions are permissible for account owners over the age of 55.
There are a number of benefits. First, the contributions are tax deductible. It's an above-the-line deduction, meaning you can take the deduction even if you do not itemize. Because it reduces your adjusted gross income, which is in turn used to determine your eligibility for all sorts of tax breaks, above-the-line deductions are especially valuable. Contributions stop being deductible once you are eligible for Medicare.
A second benefit is that the earnings growth in the account is not taxed currently. You can accumulate money from year to year - there is no "use it or lose it" provision.
A third benefit is that is that withdrawals used to pay for qualifying medical expenses are tax-free. This is true even if you are eligible for Medicare when the distribution is made.
Once in your lifetime, you can even roll money from an IRA into an HSA. This effectively lets you convert tax-deferred IRA money into tax-free HSA money, accessible for medical expenses at any age. However, the maximum rollover is the same as the maximum annual contribution limit, so it's not a huge windfall.
Most people will probably use these plans just to cover their insurance deductibles. But they have greater potential than that. High-income individuals who otherwise max out their tax-deductible retirement savings plan contributions may want to take note. Provided they qualify for an HSA, they could make maximum contributions to it as well as to their traditional retirement plan. For people under the age of 65, distributions from an HSA are subject to ordinary income taxes plus a 10% penalty. But once the account owner is 65 or older, the penalty no longer applies.
So as a retirement supplement, you can make deductible contributions, get tax-free growth, and make withdrawals that are taxed as ordinary income - just like a traditional IRA. This would be especially attractive to people who are excluded from making deductible IRA contributions because they participate in a qualified plan at work, and have adjusted gross income over the threshold. So even if you can easily afford the deductible on your high deductible insurance - remember that the HSA has several advantages.
HSAs Have Several Advantages
Posted on February 22, 2008 by Rev. John F. Harrison, CFP®
The upcoming presidential election has a number of candidates talking about health insurance reform and universal coverage. Massachusetts recently made it mandatory for most people to purchase health insurance. As small business owners and self-employed people know, health insurance isn't cheap. Some people could benefit from choosing a high-deductible plan to keep their costs in line.
Enter the HSA. HSA stands for Health Savings Account. Individuals with a high-deductible health plan (defined as a deductible of at least $1100 per individual or $2200 per family in 2008) are eligible to open an HSA, and can contribute up to $2900 for individual coverage, or $5800 for family coverage. Additional catch-up contributions are permissible for account owners over the age of 55.
There are a number of benefits. First, the contributions are tax deductible. It's an above-the-line deduction, meaning you can take the deduction even if you do not itemize. Because it reduces your adjusted gross income, which is in turn used to determine your eligibility for all sorts of tax breaks, above-the-line deductions are especially valuable. Contributions stop being deductible once you are eligible for Medicare.
A second benefit is that the earnings growth in the account is not taxed currently. You can accumulate money from year to year - there is no "use it or lose it" provision.
A third benefit is that is that withdrawals used to pay for qualifying medical expenses are tax-free. This is true even if you are eligible for Medicare when the distribution is made.
Once in your lifetime, you can even roll money from an IRA into an HSA. This effectively lets you convert tax-deferred IRA money into tax-free HSA money, accessible for medical expenses at any age. However, the maximum rollover is the same as the maximum annual contribution limit, so it's not a huge windfall.
Most people will probably use these plans just to cover their insurance deductibles. But they have greater potential than that. High-income individuals who otherwise max out their tax-deductible retirement savings plan contributions may want to take note. Provided they qualify for an HSA, they could make maximum contributions to it as well as to their traditional retirement plan. For people under the age of 65, distributions from an HSA are subject to ordinary income taxes plus a 10% penalty. But once the account owner is 65 or older, the penalty no longer applies.
So as a retirement supplement, you can make deductible contributions, get tax-free growth, and make withdrawals that are taxed as ordinary income - just like a traditional IRA. This would be especially attractive to people who are excluded from making deductible IRA contributions because they participate in a qualified plan at work, and have adjusted gross income over the threshold. So even if you can easily afford the deductible on your high deductible insurance - remember that the HSA has several advantages.
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News Flash
How bad is it?
It's no secret
Responding to market mayhem
Is there a topic you'd like us to talk about? Email your suggestions or questions to us.