Qualifying for a Health Savings Account

You don't have to have earned income -- just a high-deductible health insurance policy -- to sign up for one of these tax-advantaged accounts.

I am 60 and retired with sources of income from investments and pensions, but no earned income. Would I qualify for a health savings account if I took out a high-deductible policy?

You sure can, and it's a good idea. Unlike with IRAs, you don't need to have earned income to qualify for a health savings account. Instead, you just need to open a high-deductible health insurance policy. For 2008, the deductible must be at least $1,100 for individual coverage or $2,200 for family coverage.

Then you can make tax-deductible contributions to a health savings account. In 2008, most people can contribute up to $2,900 to an HSA if you have individual coverage, or up to $5,800 for family coverage. People who are age 55 and older also can make a $900 catch-up contribution in 2008. You can't contribute to an HSA after you sign up for Medicare at age 65.

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You don't need income from a job to take advantage of the tax deduction. "They can deduct their contributions from any type of taxable income, such as earnings from investments, even if it is not earned income," says Roy Ramthun, president of HSA Consulting Services in Washington, D.C.

The money accumulates tax-deferred in the account, and you can use it tax free for medical expenses in any year. After age 65, you can use the HSA money for anything without a penalty. But it's still best to reserve the account for health care costs, which can spare you the tax bill.

If you're on Medicare, the HSA should still come in handy for plenty of out-of-pocket expenses, such as co-payments and deductibles as well as premiums for Medicare, Medicare Advantage or Part D (but not medigap premiums). You also can use the money for part of the premiums for qualified long-term care insurance policies.

For more about HSAs, see Health Savings Account Answers.

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.