by Archie M. Richards, Jr.
November 19, 2007

A Health Savings Account (HSA) saves money on your health insurance. You can own one even if you're not working.

HSAs have two parts:

1. A savings account, like an IRA. Contributions to it are tax deductible, and the earnings are not taxed. Up to a specified amount, the money is used to pay medical expenses.

2. Above the specified amount, all of your medical costs are paid by a high-deductible medical insurance plan. If you're covered by your spouse's medical plan, you must opt out of it and buy your own high-deductible plan.

Until you reach the deductible, the savings plan pays for medical expenses. Then the insurance takes over. (Medical receipts should be saved to show you've met the deductible.)

During the first year or two, you might incur medical expenses before you've built up the HSA's savings account. To cover the difference between the account balance and the policy's deductible, you can purchase an inexpensive rider to the insurance policy.

Withdrawals from the HSA for qualified medical expenses are tax free. You may even refund HSA money to yourself if you've paid medical expenses with non-HSA money.

HSA money not spent during the year can be spent in the future, with no limit on age.

To qualify for an HSA, you don't need earned income, and you can have a plan no matter how high your income. These are the requirements to start an HSA:

• You must have a high-deductible health insurance plan.
• You can't have any other comprehensive medical insurance.
• You can't be claimed as a dependent on someone else's tax return.

You can't start an HSA if you're on Medicare. But you can continue one after you get on Medicare.

HSAs must have only one owner - no joint ownerships permitted.

An individual in 2008 can choose the deductible on the health insurance ranging from $1,100 to $5,600. For a family, the deductible can range from $2,200 to $11,200. The higher the deductible, the lower the premium.

For an individual in 2008, the maximum HSA contribution is $2,900 ($3,800 for those 55 or older). With a family plan, the maximum contribution is $5,800 ($6,700 for those 55 or older).

The contributions to your HSA can be made by anyone (except your employer) up to the due date of your tax return - generally April 15 of the next year. No matter who pays the contributions, they're deductible.

HSAs are offered by banks, credit unions, insurance companies, and other financial firms. Most plans offer an interest-bearing account, a checkbook, debit card, and online access. The assets in one HSA plan can be transferred to another.

You can acquire mutual funds of stocks within the HSA. But don't go overboard on stocks because you might incur a medical expense when you'd prefer not to sell the stocks.

Withdrawals not used for qualified medical expenses are taxed. They're also subject to a 10-percent, non-deductible penalty tax if you're 65 or under. But after age 65 (or after you die), the penalty tax is excused.

The list of qualified medical expenses includes doctor and hospital fees, dental, vision expenses, prescription drugs, certain non-prescription drugs, a limited amount of long-term care insurance premiums, and premiums for Part B Medicare insurance. Distributions can also be used for Medicare premiums paid by you or your spouse after age 65. If you're unemployed or disabled, you can even use your HSA savings account to pay the health insurance premiums.

At the owner's death, the HSA passes to the beneficiary or beneficiaries named in the plan. An inheriting spouse is treated as the new owner. An inheriting non-spouse must pay income tax on the account balance for the year of the original owner's death.

HSAs are convenient and tax deductible. Since the premiums on the high-deductible medical insurance are low, the plan will cut down on your total medical costs. HSA's are an excellent way to cover your medical expenses.