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What is a Health Savings Account (HSA)?

Health Savings Account BankA health savings account (HSA) is a method of paying for health care expenses with pretax dollars, or by writing off a portion of the expenditure in the following year’s taxes. This is different from traditional insurance, and different from a regular savings account. Read on to learn more.

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How does a Health Savings Account Work?

Participants in a health savings account deposit money that is to be used specifically for approved medical expenses. The money is not usually taxed upon deposit or use. In some circumstances when it is tax the participant can write that expenditure off on his taxes with a 1040 Form the following year.

So the simplest way to explain the benefits of HSAs is that they offer significant tax savings to the people that use them. In fact, the combined savings of FICA and Medicare taxes total 7.65% in savings. This is why they are so popular.

Can anyone open a Health Savings Account?

No, in order to use an HSA you must purchase a High Deductible Health Plan (HDHP). These are also referred to as catastrophic coverage plans. With a high deductible health insurance plan you agree to pay a much larger percentage of the deductible (the amount you must pay out of pocket before you insurance company pays anything).

The up side of a HDHP plan is that they are inexpensive to purchase. The down side is that you are going to pay much more when you incur high medical costs.

The US Department of Treasury releases the limits each year for how much money each person and family can contribute to an HSA and on the minimum and maximum out of pocket deductibles.

For 2010 a single person may contribute $3,050, a family can contribute $6,150 and those over 55 can contribute $1,000 in what is called the Catch Up fund. For a single person the deductible in a HDHP must fall between $1,200 and $5,950. For a family the deductible limits are $2,400 and $11,900.

So those opting to save tax money must be prepared to pay those larger amounts out of pocket when medical needs arise.

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How do you get money out of an HSA?

Withdrawing funds from an HSA is simple, since it is your money. Options may include a debit card, checks or reimbursement. While you don’t need approval to take out your funds you must keep documentation of all your medically related expenses. Otherwise you will pay a 10% penalty. This penalty does not apply to seniors and the disabled.

One great point in favor of an HSA is that you can roll any left over funds into the next year’s account. It’s still your money. A Flexible Spending Account (FSA) on the other hand must be used in the year for which it is created. There are also Medical Savings Accounts (MSAs) that are used by the self employed and companies with less than 50 employees. HSAs can be offered by companies of any size.

How do I decide if an HSA is right for me?

The largest factor in deciding whether or not to invest in a health savings account is whether or not you can truly afford the high deductible plan that accompanies it. Based on the 2010 number a family must be prepared to pay a minimum of $2,400 from their own funds. If you don’t have this amount of cash in reserve then this type of account is not right for you. On the other hand, if you do have the money, then an HSA can save even more of your money by avoiding the taxes mentioned above.

If an HSA is not an option then you will want to source companies that offer lower insurance rates and deductibles. Try using the online rate quote tool you see on this page. You’ll get fast and free quotes from several companies to compare. Even if you think that a health savings account is right for you, the tool can give you rate quotes from insurance providers that offer that savings device.

Enter your zip code and start comparing health insurance quotes now!

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