Updated Rules on Health Savings Accounts

My article on updated Health Savings Account rules:

http://www.suite101.com/content/why-open-a-health-savings-account-a376127
Health Savings Accounts (HSAs) are one of the best ways of reducing your tax load. If you have a high deductible insurance policy -- with a deductible of over $1,200 for an individual or $2,400 for a family, you can set aside money, tax-free, to pay for medical expenses your insurance doesn't cover.

You can either put the money into a savings account, in which case it is FDIC insured, or you can invest it in stocks, where the money invested is not insured. Some financial advisors tell their clients to contribute to their HSAs even before they contribute to their IRAs. The reasons for this are two-fold. First of all, a couple on the verge of retiring can assume they will need at least $190, 000 if they both have a normal life expectancy. Secondly, money from an HSA is never taxed if it is used for medical expenses. Suppose you have a major illness and need to withdraw money to pay the related bills. If you withdraw from an HSA, the money is untaxed as long as it goes to pay medical bills. However, if you withdraw from an IRA, you will pay standard tax rates although the penalty is waived for health care costs.



A caveat: If you are older than 65 and want to use this money for non-medical expenses, you will pay regular tax rates. If you are under 65, you will pay regular tax rates PLUS a 20% penalty. Because this fee is a stiff one, you may want to establish an emergency fund for unexpected non-medical expenses before contributing to your HSA.