23 June 2010
Consider opening a Health Savings Account
If you are covered under a high deductible health plan, you may be eligible to make tax deductible contributions to a Health Savings Account (HSA). Contributions may remain in the account from year-to-year until you use them and can generate tax-deferred or tax-free earnings. An HSA is “portable” so it stays with you if you change employers or leave the work force. Also, the interest or other earnings on the assets in the account accumulate tax free.

For 2010, you can contribute up to:
  • $3,050 if you have self-only coverage with an annual deductible of not less than $1,200 and your annual out-of-pocket expenses do not exceed $5,950.
  • $6,150 if you have family coverage with an annual deductible of not less than $2,400 and your annual out-of-pocket expenses don’t exceed $11,900.
  • $1,000 in catch-up contributions for individuals age 55 or older.

You can receive tax-free distributions from your HSA to pay for any qualified medical expenses for the current or prior year as long as the expenses were incurred after the HSA was established. Most medical expenses incurred by you, your spouse, or any dependents qualify. Nonqualified distributions, however, are taxable and generally subject to a 10-percent penalty. Caution: This penalty increases to 20 percent for nonqualified distributions after 2010.

Because earnings are tax-deferred, an HSA could also be used as a means to save for retirement. Nonqualified distributions after attaining age 65 are taxable but not subject to the additional penalty.
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Topic: Advice