Health Savings Accounts (HSAs)
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Health savings accounts should not be confused with health insurance, but they can be a valuable tool for helping people handle health care costs.
Health savings accounts were introduced in in January 2004, so they are relatively new.
Health savings accounts allow people to set aside tax-free money to pay for medical expenses.
They work in a way very similar to an IRA retirement savings plan.
Funds roll over from one year to the next and you may use (or not use) the account funds from year to year.
If you use money from a HSA for permitted medical expenses, you do not owe taxes on it.
Qualified expenses include deductibles and other medical expenses for the account holder and their dependents.
In order to set up a health savings account, you will need a health insurance plan that meets certain criteria including a minimum deductible (currently $1000 for individuals).
Tax Deduction
Health savings account contributions are tax deductible going in and out, even if the taxpayer does not itemize.
Any interest earnings from the health savings account are not taxable either.
Maximum Contribution
Individuals can contribute up to their policy's annual deductible every year.
The cap for 2005 is $2,600 for individuals.
Individuals over 55 years old are allowed to make extra contributions; the amount allowed varies.
Availability
HSAs are not normally offered by employers, mainly since health savings accounts are so new.
There also tends to be confusion about them, so shop carefully if you decide that a health savings account might be a good tool for you.
Flexibility
You are allowed to use a health savings account to pay for anything from a deductible to a doctor visit to an over-the-counter medication to long term care insurance or even to pay your health insurance premium (restrictions apply).
You will be required to pay penalties if you use the money for unqualified expenses.
Portability
Like an IRA, a health savings account is owned by you, the consumer, not your employer, so it can switch jobs with you.
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