The Republican Congress delivered one last gift before turning over the ship to Democrats in 2007. Unexpectedly, they enhanced the Health Savings Accounts (HSAs) in ways that make them more attractive.
HSAs are strange animals. At a basic level, they are designed to allow many taxpayers the ability to make virtually all health care expenses tax-deductible. However, HSAs can also act as exceptional retirement saving vehicles.
Anyone who has a qualifying high deductible health insurance policy can now set up an HSA fund, deduct what they invest and pull the money out tax free as medical expenses arise. If you are an employer, buying a high deductible policy for your employees is generally more affordable. It also allows them to invest in an HSA on their own. If you prefer to invest in the HSA for them, you will need to do it for everyone.
The new law allows health insurance policies that have deductibles much lower than in the past, such as about a thousand dollars, to qualify for large HSA contributions. For 2007, the maximum annual contributions are $2,850 for singles and $5,650 for families and even more if you are over fifty-five. All kinds of investment options are available for this money and you are free to choose where you want it invested.
While there are obvious advantages for those who need to use these funds to pay for medical expenses now, the real story is what HSAs can do for those who can leave the money alone. For these fortunate taxpayers, HSAs act very much like supercharged ROTH IRAs. However, unlike Roth accounts, even high-income taxpayers are eligible.
Since a major fear going into retirement is unexpected or expensive health care costs, building up an HSA account can provide a valuable retirement defense fund. Since this option will be available only for those with extra money to invest, it was a surprise that Democrats supported it in the waning days of a Republican Congress.
Our liberal California legislature has been more predictable. The deduction for investing in an HSA is not allowed on the California return and income drawn out is taxable. This complexity makes HSAs less popular here than in the rest of the country.
However, you should consider this, especially if you have the means to leave the money untouched for the long haul.