I’m very excited to announce that I am finally moving to a high deductible plan and opening a Health Savings Account (HSA). When used properly, this set up can really help you save money on health care costs. A HSA allows you to make a tax deductible contribution for use on your health care expenses. You can set money aside to grow and use it to cover the cost of your higher deductible (to qualify for a HSA, you must choose the high deductible plan). With this combo, you save money on your health insurance premiums, and the money in HSA is yours to grow and keep.
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For more information about HSA, please visit Using a Health Savings Account to Lower Your Medical and Health Insurance Costs.
However, you can’t pour thousands upon thousands of dollars into your HSA simply to enjoy the tax deduction and the tax free growth (as long as you use the money for qualified health care costs), because there are limits on how much you can contribute per year.
In many ways, a HSA works like a traditional IRA. You are even allowed to withdraw money from your HSA penalty-free using the same age requirements as an IRA (59 1/2). In other words, the HSA can serve as another retirement account — as long as you understand that traditional IRA rules apply to non-health withdrawals — e.g., if you take money out for something other than health care costs, you will have to pay income taxes on the money.
Because of the nice tax advantages offered by the HSA, there are contribution limits involved. It is important to understand these limits so that you can avoid some of the problems that come with making extra contributions (especially if you claim your tax deduction). For 2011, contribution limits on the HSA are:
It is also worth noting that you have to meet the deductible requirements in order to qualify for a health savings account, you have to have a high deductible health plan (HDHP). For individuals, that deductible is $1,200. For families, that deductible is $2,400. The HSA is designed to help those with high health insurance deductibles save up enough money to meet their out-of-pocket expenses.
For me, the main appeal of the HSA is that I can take money and use it for my benefit. My brand-new HDHP has a premium that is half what my old premium was. I am taking that difference each month and putting it in the HSA. I’m paying the same each month, but now half that money goes directly to me, for my benefit. And it can be used in the future. When it goes to the health insurance company, it’s gone — and how it’s used is completely out of my control.
It is important to note that the HSA is not right for everyone. Someone with a chronic condition may have too many expenses to pay out of pocket. When you decide to go with a HDHP combined with a HSA, you will have to pay more up front for your health care and have higher out of pocket maximum to deal with. For individuals, the maximum out of pocket is $5,950, while the family out of pocket maximum is $11,900.
If you think this arrangement might work for you, check with your health insurance company, and enroll in a HDHP during your next open enrollment.