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Health Savings Accounts (HSAs) represent the biggest change in health and retirement care since Social Security and Medicare. They allow you to save hundreds of thousands of dollars, tax-free, for your future medical expenses or retirement—while financially reforming the entire U.S. healthcare system.

When people say they have a “Health Savings Account,” they typically mean that they have a high-deductible ($1,000 to $5,250) “HSA-qualified” health insurance policy, combined with an IRA-type savings account called an “HSA"—both components are discussed in this chapter. Employers setting up HSA programs for their employees should read this chapter and Chapter 12.

You should not contribute one more dollar to your traditional IRA, 401(k), or any other savings or brokerage account until you have first contributed 100 percent of the maximum amount allowed, up to $5,250 a year (in 2005), to your Health Savings Account (HSA).

If your employer makes contributions to your 401(k), you should ask your company instead to first contribute the maximum amount to your HSA.

With a traditional IRA or 401(k), you receive a deduction from your taxable income for 100 percent of the contributions you make each year, but after age 65 you must pay state and federal taxes at high ordinary income tax rates on all distributions—even on capital gains in these accounts. In contrast, with a Health Savings Account (HSA), you receive all the same benefits you do with a traditional IRA or 401(k), except you never have to pay income taxes on distributions used for qualified medical expenses—and you can take these distributions without penalty anytime before or after age 65.

HSAs have all the same benefits of traditional IRAs and 401(k)s—plus distributions from HSAs are allowed tax-free at any time for qualified medical expenses.

HSAs have triple tax advantages:

  • Contributions are tax-deductible going in.
  • Appreciation is tax-free.
  • Withdrawals are tax-free (when used for qualifying medical expenses).

An HSA is the only tax-advantaged investment vehicle that offers permanent rather than temporary escape from state and federal income taxes.

Average Monthly Premium for Individual/Family Health Insurance Policies (2005–2006)

 

Traditional Policy, Lower Deductible

Health Savings Account Policy, Higher Deductible

Single

$173

$92

Family

$541

$272

  • HSAs reward consumers for making financially smart but medically sound choices—like choosing generic drugs over chemically identical name-brand ones.
  • HSAs provide employees with the financial and health coverage buffer they need between jobs.
  • HSAs significantly reduce the 28 percent ($560 billion) of the $2.0 trillion U.S. healthcare budget that goes to paperwork.
  • HSAs rescue Medicare by ensuring that baby boomers have the necessary funds to supplement Medicare during their retirement.
  • HSAs return entrepreneurial innovation to U.S. healthcare, since tens of millions of Americans with HSAs will be allowed to select the medical provider of their choice.
  • HSAs promote proactive preventive care and wellness care instead of offering reactive “sickness medicine” provided by third-parties who cannot make optimum long-term choices.
  • In addition, HSAs do much, much more, as explained throughout this book.

At the time of this writing, HSAs are less than 14 months old. Yet a survey of the first one million HSA purchasers revealed the following:

  • The majority of HSA purchasers (52 percent) were 40 years of age or older.
  • Nearly half of HSA purchasers (49 percent) were families with children.
  • Two-fifths of HSA purchasers (41 percent) had incomes of $50,000 or less.
  • Three of ten HSA purchasers (30 percent) had previously been uninsured.

The HSA Safety Net: How an HSA Can Help You between Jobs
HSA-Qualified High-Deductible Health Insurance
Checkups and Preventive Care May Be Fully Covered Regardless of Your
  Deductible
Combining HSAs with Your Employer's Section 125 Cafeteria Plan) FSA or
  HRA
Choosing a Depository Institution for Your HSA
Making Contributions to Your HSA
Making Withdrawals from Your HSA
How to Spend All Your HSA Money Tax-Free after Retirement

Contrary to what many people think, you may have an unlimited number of different Health Savings Accounts at an unlimited number of financial institutions—provided the total contributions and withdrawals to all of them combined do not exceed the IRS regulations for a single HSA.
You receive all of your HSA tax benefits by making contributions to your HSA, and you receive no additional tax benefits by withdrawing funds to pay for qualified medical expenses. Moreover, the funds withdrawn from your HSA no longer accumulate tax-free interest and appreciation.

Just as you should fully fund your HSA before putting $1 into your IRA or 401(k), you should also spend any nonretirement funds you have available for medical expenses before taking out even $1 of your HSA before retirement.

 

  
  ADDITIONAL RESOURCES FOR THE NEW HEALTH INSURANCE SOLUTION
   



New Health Insurance Solutions for individuals, families, self-employeds, and businesses.

  



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