Year-end Health Savings Account Strategies

2006 is just around the corner, and there are several issues toconsider if you currently have a Health SavingsAccount, or are planning on getting one in 2006.Contribution Limits and Deadlines100% of the deposit you place in your HSA is deductible on yourfederal income taxes. All but a handful of states also make HSAcontributions tax-deductible on state income taxes. If you arelooking to reduce your 2005 tax burden and/or put away moremoney for retirement, your HSA is the first place you should putyour money if you have not yet maximized your contribution.The maximum you can contribute to your HSA in 2005 is the lesseramount of your deductible, or $2,650 for singles and $5,250 forfamilies. Individuals who are 55 or older may contribute anadditional $600.Note that contribution limits are pro-rated, based on the numberof complete months during the year in which the taxpayer has aqualifying health insurance plan. If you obtained a qualifyinghealth insurance plan in 2005, you may use our HSA Contribution Calculator to quicklydetermine your maximum contribution.You have until April 15 (or later if you file for an extension)to make your 2005 contribution. If you do not fully fund youraccount for the current year, you cannot make a catch-upcontribution for 2005 after this deadline. However, you canreimburse yourself in later years for qualified expensesincurred in 2005, even if you do not have the funds in youraccount to reimburse yourself at this time.In 2006, the maximum annual HSA contribution will go up to$2,700 for individuals and $5,450 for families, and people 55 orolder will be allowed to contribute an additional $700.To maximize your tax benefit for 2006, it is important to haveyour HSA-qualified health coverage in place no later thanJanuary 1. Record KeepingIn order to pay for a medical expense from your HSA, it must bea qualified expense. In previous issues I have discussed some of thesequalified expenses, including dental expenses, eyeglasses,chiropractor visits, over-the-counter medications, and sometimeseven nutritional supplements. Please see our qualified expenses page for more details.Now is a good time to make sure you have an accurate record ofyour medical expenses for the year. Make sure you separate theexpenses for which you have reimbursed yourself from your HSAfrom those that you paid for out-of-pocket. You'll want to keepreceipts for all medical expenditures paid from your HSA withyour 2005 tax records. Place the "non-reimbursed medicalexpenses" in a separate file, keeping them with the concurrentyear's tax records in whatever year you decide to reimburseyourself.Over-funded AccountsThe penalty for over-funding your HSA is a whopping 6%. Iactually over-funded my own account, because I had set it up inJanuary yet made the maximum deposit as if it had been in effectsince January 1. (Yes, I should have known better!)You have until April 15, 2006 to withdraw excess funds for the2005 tax year to avoid the penalty. My HSA administratorfortunately notified me of my mistake, but they had noobligation to do so. It is your responsibility, so make sure youcheck into this if you think you may have over-funded youaccount.2006 Deductible ChangesThe minimum deductible for HSA-compatible health insurance plansin 2005 was $1,000 for individuals and $2,100 for families. In2006 this will increase to $1,050 for individuals and $2,100 forfamilies. If you currently have an HSA-qualified plan with thelowest eligible 2005 deductible, that deductible willautomatically go up on January 1 to the new minimum. Strategies to Maximize Your Tax BenefitsThere are basically three different strategies you can take whendeciding how to fund your health savings account.1) Put no money in the account, except when you incur a medicalexpense. This strategy allows you to legally "launder" any moneyused to pay medical expenses. In other words, by depositingmoney into your HSA, then immediately withdrawing it toreimburse yourself for medical expenses, you are making yourmedical expenses all tax-deductible. You may want to use thisstrategy if you are on a tight budget and want to keep your cashoutlay as low as possible. 2) Fully fund the account, or at least put in as much aspossible based on your budget. Take money out of the account anytime medical expenses are incurred, and let the rest growtax-deferred. This strategy will maximize your tax deduction,while making your HSA funds available to pay any non-coveredmedical expenses before your deductible is met.3) Fully fund the account, but pay all medical expenses from anon-HSA account. Reimburse yourself for medical expenses at alater date. This strategy will allow you to maximize your taxdeduction, and will also allow you to maximize the tax-deferredgrowth of your HSA. You can then reimburse yourself, tax-free,at any time in the future for medical expenses incurred over theensuing years. (For an example of this strategy, see Maximize Your HSA, Issue 3). To maximize the potential growth of your funds, you may want tomake your 2006 deposits as early in the year as possible. Anygrowth in your account is tax-deferred, like an IRA. I plan onmaking my deposit the first week in January.If you do not yet have an HSA-qualified health insurance plan,please give us a call at 866-254-5121 as soon as possible. Bygetting your HSA-qualified health insurance in place by January1, not only will you be able to maximize your tax benefits, butyou also may be able to lock in 2005 rates for the next 12 - 24months. To your health and wealth, Wiley Long President HSA for Americahttp://www.HSAforAmerica.com P.S. Every December I write out my goals and objectives for thenext 12 months. Finance and health are two areas I always spendsome time thinking about. By staying healthy, I expect to builda nice second retirement account with my HSA. Next month I'llcover some lifestyle strategies that you may want to adopt aspart of your New Year's resolutions, that have the potential todramatically improve your health (and wealth) over the comingyears.