Tax Tip of the Week
For the week of March 22, 2004

Check out the new health savings accounts

A new type of savings account is available this year. It offers some new tax advantages and promises to give you greater flexibility in paying for your unreimbursed medical costs. And it's open to anyone who signs up for a high-deductible health care plan.

Health savings accounts (HSAs) were created in last year's Medicare legislation. Think of them as an IRA for medical costs instead of retirement. To qualify, you must participate in a high-deductible health insurance plan. The deductible must be at least $1,000 for singles or $2,000 for family coverage. With a high-deductible policy, your monthly premiums will be lower.

Each year you can contribute up to the amount of your insurance deductible to your HSA. Contributions are tax-deductible whether you itemize or not. Money in your HSA can be invested and grows tax-free. When you withdraw it and use it to pay for medical expenses, there is no income tax on the amount withdrawn. Any amounts unspent at the end of the year can be rolled over and used for future years. And if you change jobs, your HSA moves with you.

You'll pay a penalty and income tax if you withdraw HSA funds for nonmedical expenses. But the definition of medical expenses is broad, including dental, vision, and even some nonprescription drugs. Once you reach age 65, you can withdraw the money and use it for any purpose penalty-free. Of course, just as in an IRA, it's taxable as income at that time.

The tax-deductible contributions and the flexibility could make HSAs an attractive choice for managing your medical expenses. Contact our office if you'd like to learn more about how they might work for you. 

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