A Tax Hat Trick for Health Accounts
Procrastinators can open an HSA now and still fund it to the max.
By Anne Kates Smith, Senior Associate Editor
From Kiplinger's Personal Finance magazine, November 2008
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It's not too late to set up a health savings account this year and contribute the maximum amount -- as long as you get moving by December 1.
Health savings accounts are tax-favored individual accounts used in conjunction with qualified health-insurance policies that carry high deductibles. HSAs confer a triple tax break: You fund them with pretax earnings (or with contributions deductible from your taxable income), investment returns compound tax-free and withdrawals are not taxed as long as you use the money for medical expenses. The number of HSA converts grew 36% last year, to more than six million.
New IRS regulations allow folks who are eligible for an HSA on December 1 to stash the full amount permitted for all of 2008 in their accounts -- up to $2,900 for an individual (add a catch-up contribution of another $900 if you're 55 or older) and $5,800 for a family. The catch: You must remain eligible for an HSA through 2009. (These deadlines assume taxpayers operate on a January-December taxable year.) Next year, the contribution ceiling will be raised to $3,000 for individuals (plus $1,000 in catch-up contributions) and $5,950 for families.
You're eligible for an HSA if you're younger than 65, aren't covered by another health-insurance policy, and purchase a high-deductible health plan on your own or through your employer. In 2008, deductibles have to be at least $1,100 for individuals or $2,200 for families, and out-of-pocket spending (including deductibles and co-payments but not premiums) can't exceed $5,600 for an individual or $11,200 for a family.
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