Health savings accounts first became available in 2004 and have been growing in popularity every since. Today they are used by many individuals and families as a means to (hopefully) save money on their year-end tax bills, as well as a way to more effectively manage the cost of health care throughout the year.
To take advantage of a health savings account, you must have what is called a high-deductible health plan. If you qualify for and decide to open a health savings account, any money that you deposit into the account is not taxed on the federal level. Some states offer tax breaks on health savings accounts as well. The money saved in the account can then be used tax-free to pay for qualified health care expenses.
How Can a Health Savings Plan Save You Money?
Health savings plans can help you save money on you health care costs through tax breaks.
- Federal Income Tax Savings: When you invest into a health savings plan, you will be able to take 100% of the amount that you invest and use it to lower your adjusted gross income for the year in terms of tax purposes. This can offer you huge tax savings, including the possibility of lowering your tax bracket, making you eligible for other tax deductions and more.
- Tax-Deferred Savings: When you invest into a health savings plan your money grows tax-free. The only time you would pay taxes on dispersed funds is if you took the money out and used it for non-qualified medical expenses.
What Are the Other Benefits of a Health Savings Plan?
In addition to tax breaks, opening and maintaining a health savings plan has other benefits as well. Benefits include the following:
- Any funds that you deposit into your account that are not spent in the given calendar year can be rolled over to the following year without any penalties.
- You can use the funds in your account to pay for a variety of medical expenses, including dental, vision, alternative care, prescription drugs and over-the-counter medications that are purchased with a prescription from your doctor.
- Health insurance plans are not specific to your place of employment and can move with you when you change jobs and health plans. This means that if you change jobs, you will not need to close out your account and open a new one.
Who Qualifies for a Health Savings Plan?
In order to qualify for a health savings plan, your health coverage plan must be labeled as an HDHP, or high-deductible health plan, meaning that it carries a higher deductible as compared to a typical plan.
In addition to having a high-deductible plan, you must also meet some other criteria: you cannot have health care coverage from any other source, be enrolled in Medicare or be a dependent on anyone else’s federal tax return.
What Are the Plan Limits for the 2011 Tax Year?
Amounts can change from year to year. For 2011, the following figures apply:
- In order to qualify for a health savings plan in 2011, your health care plan must have a minimum deductible of $1,200 for self-only coverage, or a minimum deductible of $2,400 if you have family coverage.
- Contribution limits for 2011 for individual coverage cannot exceed $3,050, and for family coverage cannot exceed $6,150.