Among tax shelters, Health Savings Accounts (HSAs) may be unique. They offer three tax advantages:
- Contributions are tax-deductible.
- Investment earnings inside the account aren’t taxed.
- Withdrawals are tax-free, if used for qualified medical expenses.
Tax-deductible contributions are limited to the amount of the health insurance policy’s deductible. In 2006, maximum HSA contributions are $2,700 for individual coverage and $5,450 for families. (Individuals who are 55 or older can make catch-up contributions up to $700 this year.)
HSA deductions are “above-the-line writeoff,” so they will reduce adjusted gross income (AGI), for all taxpayers, even those who don’t itemize deductions.
HSAs are self-directed, and a wider range of investment options is becoming available. In addition to savings accounts, some companies offer no-load mutual funds and self-directed brokerage accounts.
The list of qualified expenses includes vision and dental care as well as some premiums for long-term care (LTC) insurance. However, tax-free withdrawals are not permitted for cosmetic surgery, health club dues, smoking cessation programs, weight-loss programs, over-the-counter medication, or the premiums for Medigap insurance.
