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Shelter funds in HSA

By HELEN HUNTLEY
Published June 26, 2005

Health savings accounts offer a way to set money aside for health care expenses in retirement, as long as you don't get sick and need to spend the money before then.

The accounts became available last year to people who buy health insurance with high deductibles who are not covered by another health plan, such as Medicare, Medicaid or a spouse's insurance plan. In addition, you can't have a health savings account if you have a flexible spending account that allows you to pay health costs with pretax dollars.

The big attraction of HSAs, as they are known, is that contributions are tax-deductible and withdrawals spent on health care costs are never taxed. Each year you can make contributions equal to the amount of your insurance deductible up to $2,650 (individual policy) or $5,250 (family coverage.) Additional "catchup" contributions are allowed for those 55 and older; $600 is the amount for 2005.

Money that isn't spent at the end of the year stays in the account, accumulating interest. That's an advantage over flexible spending accounts, which operate under a use-it-or-lose-it rule and do not earn interest.

Golden Rule Insurance Co. recently announced that its customers have tucked away $132-million since health savings accounts became available in January 2004. Florida is one of the company's top markets.

Many companies now offer the high-deductible policies, which usually have lower premiums because insurance won't pay health care bills until costs exceed the deductible. They are available through group health plans and as individual policies.

The minimum deductible for an HSA-qualifying plan is $1,000 for an individual and $2,000 for a family. Plans can have out-of-pocket expenses of up to $5,100 for individuals and $10,200 for families.

Golden Rule says a family can save about 60 percent on premiums by opting for a policy that pays 100 percent after a $5,250 deductible rather than one that pays 80 percent after a $500 deductible.

As with any tax-sheltered account, if you contribute every year for many years and never take any money out, you can end up with a tidy sum. But regular withdrawals for health care expenses will eliminate or wipe out that advantage.

"It will primarily help high-income individuals who never need to consume health care," said Dallas Salisbury, president of the Employee Benefit Research Institute.

If you have health care expenses, you can save on taxes by using an HSA to pay them. Then you'll have to find another way to accumulate money to pay for health care in retirement.

Some advisers are telling clients to forgo current tax savings and pay their health care costs with after-tax dollars. That way money can stay tax sheltered in an HSA until it is needed during retirement.

Others suggest saving more in other retirement savings vehicles.

Most workers have access to retirement savings plans on the job, but are contributing less than the $14,000 a year the IRS allows. Still fewer take advantage of the extra $4,000 contribution permitted for people 50 and older. Employer-sponsored plans are an attractive way to save because contributions reduce taxable income - the money isn't taxed until it's withdrawn - and employers typically contribute to the accounts.

Outside the workplace, workers and their spouses have options for individual retirement accounts that can be deductible or nondeductible, depending on income and retirement plan coverage. The maximum IRA contribution this year is $4,000, with an extra $500 for those 50 and older.

One of the most attractive options is a Roth IRA. Money goes in after-tax, but comes out tax-free if plan rules are followed. Eligibility for at least a partial contribution extends to people with incomes of less than $110,000 if single or $160,000 if married filing jointly.

For more information on HSAs, see IRS Publication 969 (www.irs.gov) and "All About HSAs" (www.ustreas.gov)

[Last modified June 23, 2005, 20:10:03]