January 4, 2009

Health Savings Account plan for 2009

The other day I listed my financial goals for 2009. One of the goals was to maximize our Health Savings Account (HSA) contribution for 2009. The maximum contribution that you can make to an HSA in 2009 is $5,950 for a family or $3,000 for a single person.

About my HSA account in general
I have an higher deductible medical insurance plan with an Health Savings Account at work. I chose this plan because my monthly premiums are $0 excluding the HSA contribution. By comparison the standard health insurance would be $3,500 a year or an HMO would run $2,200 a year. The HSA plan I'm on has a $2,400 deductible and $4,200 maximum out of pocket. Since the HSA funds are BEFORE TAX its a great savings. First of all I could fun the plan at $4,200 before tax for an out of pocket cost of about $3,150. This is a few hundred less than the standard health plan. But I only use that money if we max out the medical expenses. If our expenses are low then we save more.

Why maximize the contribution?

First reason to pay into the HSA is to cover any medical costs we have for the year. Our maximum out of pocket costs are $4,200. By maximizing our HSA account for the year we will make sure we have all our medical bills covered 100%.

The contributions to the HSA are pre-tax. Generally my tax rate is around 25% off the top of my income. So for every dollar I put into the HSA thats 25¢ which I avoid in taxes. By investing in the HSA we avoid taxes. Plus this money can grow tax free while its in the savings account.

We are likely to have medical expenses in the future. So we should be able to use this money to cover normal medical costs in future years. As long as we're using the money for a qualified medical expense it can be used completely tax free.

Ultimately even if we never use the money then we could withdraw it after age 65 and only pay income tax on it. In this way it would have the same tax deferred savings benefit of an IRA.

For more on Health Savings Accounts:
Wikipedia page on HSAs.
Dept. of Treasury HSA page.

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