Is a Health Savings Account Right for You?

Editor: The factual information was assembled from the Social Security Administration administration website at ssa.gov The writing and compilation is original, of course. (I once worked for SSA and I'm familiar with many things about it)

Health Savings Account plans, or HSAs, were intended to provide relief to people faced with high medical insurance premiums. They have been used more frequently as a way of enhancing investment portfolios.

A primary advantage of the Health Savings Account is that IRS rules permit contributions from tax-deductible dollars. Deducting the maximum contribution each year can result in considerable federal tax savings.

Maximum HSA contribution for an individual in 2008 is $2900. A family can contribute double that, to a maximum of $5800. People aged 55 or older can play "catch-up" by contributing $900 more in 2008 and $1000 in 2009, and for any years afterward. Unlike traditional IRA plans, there are no required distributions or withdrawals after age 70 ½. HSAs have no time constraints placed upon them.

HSA monies not used to pay for medical expenses can accumulate and earn tax-free interest and dividends. Health Savings Account funds can be invested in common investment vehicles like stocks, bonds, mutual funds, or CDs. Dividends and interest accrued in the accounts are excluded from the annual tax bill unless the money is withdrawn and used for other purposes. If the funds are withdrawn to pay for qualified medical expenses, it is simply not taxed.

HDHP savings can be used for other purposes but will be taxed at the regular federal income tax rates if the worker is aged 55 or older. Persons younger than age 55 who decide to withdraw HSA funds and use them for other purposes will be assessed a hefty 10 percent penalty.

An oddity of the Health Savings Account regulation is that contributions can be made from the taxpayer, the employer, or even a relative.