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Tax Planning

Health Insurance

A health savings account, or HSA, is another way to get a tax break for stashing away money for a specific purpose, in this case to pay health-care costs. HSAs work much like many employers' flexible-spending accounts -- which allow you to pay for health-care expenses with pretax dollars -- with a key difference: You can roll over unspent money from year to year. So if you stay relatively healthy, you can build up a nice nest egg for your retirement health costs. "It's a great way to save tax-free for medical expenses down the road," says Alan Kahn, president of AJK Financial Group, a financial-planning firm in Syosset, N.Y.

Here's how it works: You can open an HSA if you have a health-insurance plan with a high deductible -- at least $1,100 for individuals and $2,200 for a family. You can contribute up to $2,900 to the plan this year ($5,800 for family coverage). Contribution levels rise gradually each year and, if you're 55 or older, you can kick in an extra $900 in 2008.

Depending on the plan, you should have a variety of investment options similar to those in an IRA or 401(k). Your contributions and investment gains aren't taxed as long as you use the money for qualified expenses, which include a broad range of medical needs as well as dental and vision care. Once you're 65, you can also use the money for nonmedical expenses without the usual 10% penalty, although you'll have to pay taxes on your contributions and investment gains.

Many employers offer HSAs and high-deductible health plans as an option, so ask about them during your employer's next open-enrollment period. Self-employed workers can also sign up for HSAs in most states. Visit HealthDecisions.org to find a plan in your state, or ask an insurance agent.

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