Times are tough. In the wake of a lackluster economy and misguided health care reforms, Americans are struggling to find affordable health insurance. Fortunately, there’s one tax-friendly option that puts consumers in control of their health care expenses: a health savings account (HSA).
People who enroll in a health savings account can save money for health expenses, all while accruing interest and lowering their taxes. It works like this: whatever you put into your health savings account before the tax deadline in April becomes an “above the line” deduction for your previous year’s tax return. So that money is not counted as income, and therefore it’s not subject to income tax or FICA tax. That can result in some serious savings.
AARP offers an easy overview on setting up a health savings account —
To get started, simply enroll in a qualifying high deductible health plan, and then open a dedicated savings account for making your tax-free deposits to pay for your medical care. You an enroll through insurance companies, banks, credit unions and approved employers. Once set up, you begin saving money for health expenses, and if you happen to reach your deductible, the insurance policy begins paying out benefits. There are limits to the amount of money you can deposit into your account, and right now the absolute maximums are $3,050 a year for individuals and $6,150 for families. Plan members over age 55 are allowed an extra $1,000 per year to play catch up.
Perhaps best of all, unlike a flexible spending account, funds left over in an HSA at the end of the plan year simply roll over and accumulate year after year. And if you ever decide to stop contributing to your HSA, you won’t lose that money – it remains in your account, still available to be spent on qualified medical expenses.
A health savings account works well for a variety of consumers, whether they’re in the market for individual health insurance or family health insurance. Some employers even offer HSAs for their employees. In that case, employer contributions act just like personal deposits, in the sense that the contributions are not counted as income and, again, not subject to income tax.
If the tax incentives weren’t enough, most consumers reduce their medical expenses simply by being in charge of their own health care. They save the money, and they choose how to use it, rather than being subjected to one-size-fits-all group plans, which often leave participants paying for services they don’t even need.