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(HealthNewsDigest.com) – Whatever comes to pass with current talk of health care reform, one thing is still true: In recent years, more Americans have opted for high-deductible health insurance plans. With this coverage, consumers pay lower premiums in exchange for paying a higher share of medical bills.
But with a high-deductible health plan (HDHP) comes a welcome option – the health savings account (HSA), a tax-advantaged account from which individuals are expected to pay for their care. Understanding how to use an HSA to its maximum advantage can go a long way in taking care of your physical and financial health.
First, know that HSAs are tax-benefited accounts that allow people to save money (and earn interest on those savings) specifically for health care expenses. However, setting up an HSA requires saving enough to fund the higher deductibles of the accompanying plans. An individual deductible might be $1,000 to $2,000, and a family deductible might be $5,000 to $10,000. That’s how much the patient must pay each year before insurance coverage kicks in.
HDHPs have lower monthly premiums, based on the idea that plan members will invest additional funds, pre-tax, in their HSAs. (To understand contribution rules, check out http://www.kiplinger.com/columns/ask/archive/2007/q0118.htm.) Then, they can pay qualified medical expenses from their HSA fund (on a tax-free basis) — thus paying for health care with pre-tax dollars. These expenses do not, however, include insurance premiums, with a few exceptions: if the plan member is unemployed or receiving COBRA coverage from a former employer, or if the member uses HSA funds to pay Medicare premiums (but not Medicare “gap” coverage).
Funds in an HSA roll over from year to year and can be kept indefinitely if unneeded. After age 65, individuals can use HSA funds to pay for insurance premiums and non-medical expenses, too, but withdrawals will be taxed. Before age 65, any non-medical withdrawals will be taxed as income and also assessed a 10 percent penalty.1
In 2007, about 20 percent of employers offered a HDHP. More anticipate doing so in the future.2 But for many people, having enough savings in the HSA to cover their HDHP’s deductible can be a challenge. Here are some tips to help you accumulate an HSA nest egg.
Catch every (premium) drop. When you switch to an HDHP from traditional health insurance, the premiums may decrease. Save the difference in premium to accumulate savings without any change to your lifestyle.
Automate savings. Set up automatic deductions from your checking account (ideally, have the savings transferred automatically from your bank account to the HSA). Think of the savings as a mandatory bill, like your mortgage or car payment — not an optional expense that you pay if you have enough left over. After all, your health and your financial well-being are at stake.
Find money where you can. Americans are ingenious savers. Some modern methods to pinch pennies and accumulate savings include:
Bring your lunch to work once a week, but continue deducting the cost of eating out from your spending money or record it as a debit from your bank account.
Declutter and sell your unneeded goods on eBay. You can even drop your belongings at a listing service (available in most communities) that will photograph and sell them for you.
Really save on groceries. Look at your grocery register receipt where it lists your grocery savings. Then transfer that amount from your bank account to your HSA.
Save a dollar a day, either through automatic withdrawal or by putting an actual dollar in a jar. At the end of the month, you’ll be at least $30 closer to your funding goal.
Sock away windfalls. For at least a year, invest any gifts, rebates or found money in the HSA.
Start with the deductible. At a minimum, fund the HSA up to the deductible amount. Then, should you require expensive medical treatment, the cost up to the deductible amount will already be covered, rather than needing to go into debt.
Go one step further. Many HDHPs pay 80 percent of costs after the deductible is met, while the member pays 20 percent. Any HSA balance above the deductible can pay additional costs in a serious medical situation.
Remember that as long as you don’t exceed your annual contribution limit in any single year, there’s no such thing as too high an HSA balance (with the understanding, explained above, that certain withdrawals will be subject to taxes). The money in the HSA belongs to you, and it’s an investment in your future health.
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