Updated Rules on Health Savings Accounts

 2010 Rules on Health Savings Accounts (HSAs).
The situations that lead ordinary people into financial catastophe are unemployment, illness, divorce, financing an education, and illness. This post covers tax-free ways of saving for medical expenses by using Health Savings Accounts.  Note, though, that if you have an IRA, you can withdraw from it without penalty--although you must pay taxes on the money--to pay for medical expenses.

Another tax-deductible program--the Health Savings Account- (HSA)-can provide partial protecion against illness if the person has a high-deductible health insurance program.  You can contribute, tax-free--the amount of your deductible into a Health Savings Account. Provided that the money is used for qualified medical expenses, you need never pay taxes on the money at all. If you meet the eligibility requirements, you may contribute, tax-free, up to $3050 per person per year or $6,150 per family per year.

Who is eligible:

• Anyone with a high-deductible insurance plan, defined as a plan having a deductible of $1200 or more per individual per year or $2400 per family per year.
• Is not covered by other health insurance, including medicare.
• Anyone who is not listed as a dependent on someone else's tax return. Children cannot have their own HSAs but spouses can establish their own if they are eligible.

There are no income limits on who may establish an HSA and the money used to fund them need not be earned income.

The 2010 annual out-of-pocket expenses (deductibles, co-payments, and other amounts) for a high deductible health insurance plan (HDHP) cannot exceed $5,950 for self-only coverage or $11,900 for family coverage.

A table publishe by the Examiner summarizes the differences between 2009 and 2010 contribution limits and expenses.
Summary of 2009 and 2010 HSA Rules

Because you may never pay taxes on this money at all if you have an HSA and use the contributions for medical expenses, establishing an HSA is a good strategy for people with predictable medical expenses. If you do not use the money, it is not lost as it is in certain cafeteia plans and flexible spending arrangments. THe money rolls over and can be used another year.  After you retire, the account can also be used as part of your retirement savings although at that point, you must pay taxes.