Health Savings Accounts or HSAs are a new healthcare financing option introduced in 2004 that allows consumers to set up tax-deferred investment accounts tied to their health insurance policy and to use these tax-deferred funds to pay for incurred medical expenses. In essence, after setting up and funding an HSA in accordance with Federal and state regulations, you will be able to pay for many health-related expenses using pre-tax money. For most people, this is equivalent to receiving a 15% to 40% discount on qualified medical expenses! Consumers will realize even further savings by purchasing health insurance with a high deductible level -- a condition necessary to qualify for an HSA. In most cases, the benefits available under the HSA will offset the risk of that higher deductible level.
Let's look at how an HSA is normally established to better understand how this financial instrument works. An individual or family needs health insurance coverage, but must manage their overall expenses for healthcare. They choose a policy with a high deductible level (required for an HSA) in order to reduce their monthly premium. But, they are careful to select a plan that offers an attached HSA with the policy. Each tax year, this individual or family contributes funds into their HSA as follows (2006 rates): singles - $2700; families - $5450; and persons over 55 - an additional $700 per person. The actual contribution amount is claimed as a deduction against gross income on their tax return, reducing the amount of taxable income by an equal amount, even if they do not itemize deductions. The money in the HSA receives tax treatment similar to an IRA, and the investment growth of the money is not taxable while it remains within the account. At any time, money in the HSA can be withdrawn as needed to pay medical expenses without ever paying taxes or penalties. Finally, upon a person reaching the age of 65, HSA money can be withdrawn or spent for any purpose without penalty or taxes.
Another exciting advantage of an HSA is the wide array of medical expenses considered valid for the use of HSA pre-tax funds. Here is just a sampling of the types of services that can be paid for with HSA (pre-tax) money:
Dental - All expenses for regular exams, X-rays, cleanings, crowns, orthodontics, periodontics, dental supplies (toothpaste, floss) and prepaid dental plans.
Vision - All expenses for eye examinations, glasses, contact lenses, prescription sunglasses, and vision supplies (eyeglass cleaner, eye drops and contact lens solution).
Doctors - All expenses for office visits, labs, X-rays, medical supplies for asthma or diabetes, maternity, hospitalization, urgent care or emergency care.
Mental Healthcare - All expenses for psychiatrists, psychologists, therapists and counseling.
Alternative medicine - All expenses associated with naturopathic, chiropractic, acupuncture, homeopathy, ayurvedic medicine, and herbal medicine, all of which are not normally covered by health insurance.
For people seeking a way to assure good healthcare coverage for themselves or their families at a reasonable price, the HSA is a valuable tool in their arsenal. With the benefits offered through an HSA, they can choose an insurance policy with a high deductible, thereby dramatically reducing their monthly premium. When they take a portion of their monthly premium savings and fund their HSA, they will soon have access to discounted, pre-tax funds to pay for a wide variety of out-of-pocket medical expenses. And, if medical expenses remain low, the HSA savings will remain in the account for future years and for investment growth over time, much like a traditional IRA.
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