The Health Savings Accounts (HSAs) was formed by the Medicare bill signed into law by President George W. Bush on December 8, 2003. The new HAS program is considered as a “next generation” of MSA plans. Health Savings Accounts were exclusively designed to provide a helping hand for individuals to save for future qualified medical and retiree health expenses on a tax-free basis. Let us look in detail how health and savings accounts work ands what are its benefits.
Health Savings Account is a tax deductible savings account which is somewhat same as the IRA, but is designed especially for medical expenses. HSA deposits are completely exempted from tax for those who are self employed (and now about everyone with the HSA). One can easily withdraw money from the deposits with a debit card or by check to pay regular medical bills with tax free dollars. Another noted advantage is that huge medical expenses are covered by a high deductible, low cost health insurance policy. The balance amount in your HSA account will remain in your account and continues to generate interest on a tax free basis to supplement your retirement needs.
Here is how health and savings account works, in a nutshell.
You purchase a particular type of major medical insurance known as High Deductible Health Plan (HDHP). This is a special designed HAS-compatible insurance package. Then you annually donate up to $2,600 for an individual and up to $5,100 for a family to a special health and savings account. It is to be noted that slightly higher deductions are provided to taxpayers above 55 years of age. Annual deductions are indexed for inflation.
HSAs work as you obtain a tax exemption for the dollars you put into the health and savings account. However, as long as you use the money in your HSA account for appropriate healthcare expenses you aren’t taxed when you take out the money. Remember that health and savings account deductions are not limited by taxpayer incomes.
In simple words, the Health Savings Account helps you to make most or all of your uncovered healthcare expenses completely deductible from tax. Most people consider this as a great benefit as for most of them healthcare expenses are not tax free. That is with the help of a health and savings account an average family can save consider amount of money every year. For example, one can save from $400 to about &1800 every year with tax deduction. The ending savings depends upon the family’s income and the state where the family resides.
Setting up a Health and Savings Account is easy. To set up a HAS account you need to do mainly two things:
- Get a medical insurance policy which qualifies as an HDHP
- Open a health and savings account with a bank which offers HSAs.
Ask your current insurance provider whether they offer HDHP insurance. Also, do a check with your state’s Blue Cross or Blue Shield insurer.
Before you start a HSA account keep in mind two important points. First, it is advisable to very careful regarding the fees related with the health and savings account; hence make a little research before starting one. Second, obviously, if you withdraw money from your HSA account for anything other than a genuine medical expense, your withdrawal is taxable and is subject to a 10% penalty.