What you need to know to start a health savings account

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What you need to know to start a health savings account

What is an HSA? Health savings accounts, or HSAs, are a type of savings account for medical care. They've only been on the market since January 2004, so many people may not be familiar with them. Consumers and employers can fund these accounts with pre-tax dollars, putting away up to $2,650 for an individual and $5,250 for a family in 2005, according to the United States Treasury Department. (The maximum contribution is adjusted annually).
 
Who can start one? Anyone can start an HSA unless you are currently covered by Medicare. To start an HSA you must be covered by an HSA-compatible health insurance policy --a qualified high-deductible health insurance plan with at least a $1000 deductible. Someone who starts an HSA and then becomes Medicare-eligible may keep his/her account but cannot continue to make contributions to it.
 
What is a high-deductible health plan? Except for some preventive care, qualified high-deductible health coverage takes effect only after the policyholder meets a higher-than-usual deductible. In 2005, the minimum is $1,000 for an individual and $2,000 for a family. Other plans require the insured to pay several thousand dollars in deductibles before the insurer starts paying for medical expenses. The upside is that high-deductible insurance is typically less expensive to purchase than a traditional HMO, PPO (preferred provider organization) or point-of-service plan. Lowering the premium you pay to the health insurance company puts more money in your own pocket -- or into your HSA.
 
What are the advantages of starting an HSA? Contributions to HSAs accumulate tax-free and may be rolled over year-to-year without penalty. Because the account belongs to you, not your employer, you can switch jobs without losing that money. Plus, you don't pay taxes on any money withdrawn from your account to pay for qualified medical expenses.
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