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Health
Savings Accounts:
A New Way to Defer Taxes
By
Fred
Adams
Vice President- HSA
for America
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Most tax
payers fail to take full advantage of the many opportunities
to defer taxes on their current income. In addition
to reducing the immediate tax obligation, a tax-deferred investment
can grow until retirement without being reduced by income
taxes. The resulting compounded growth can sometimes
mean hundreds of thousands of additional dollars in the account
by retirement age. When taxes are paid on the money
withdrawn during retirement, it is typically at a much lower
tax rate. With most of these investment options, you
have until April 15, or your extension deadline, to fund your
account.
Health
Savings Account (HSA)
Health
Savings Accounts are the latest way that you can shelter
your income from taxes. They can be opened by anyone
with a qualifying high-deductible
health insurance plan. These plans are available
through Blue Cross Blue
Shield, Humana, Assurant,
United Healthcare, and many other
insurance companies. For 2006 there is a contribution
limit of $2,700 for individuals, and $5,450
for a family. Any money deposited in the account is
tax deductible, and grows tax-deferred. The special
advantage HSAs offer is that the money can be withdrawn from
the account tax-free at any time to pay medical expenses.
It is for this reason that many financial advisors recommend
that the HSA be the first of your tax-deferred accounts that
you fully fund each year.
Individual
Retirement Account (IRA)
Anyone
with taxable income is eligible to open an IRA. For
2004, you can put away $3,000 in your IRA. If
you are over 50, you can put away $3,500. If
you designate your IRA as a Roth IRA, you must fund the money
with after-tax dollars, but you never have to pay taxes on
the money when it is withdrawn. Beginning in 2005, you'll
be able to sock away $4,000 ($4,500 if you are
over 50).
Simplified
Employee Pension (SEP)
SEPs allow
small business owners, independent contractors, and other
self-employed individuals to place as much as 25% of their
income into their SEP account, where it will not be taxed
until it is withdrawn. The maximum annual contribution
is $41,000, giving a sole proprietor a significant
opportunity to save for retirement on a tax deferred basis.
401(k)
Many employers
offer 401(k) retirement accounts funded through pre-tax payroll
deductions. These plans allow you to contribute a percentage
of your pay, typically between 1-20%. Companies often
match some of your contribution, and taxes on any contributions
deferred, as long as the total going into the account does
not exceed the limit for the year. The maximum pre-tax
contribution dollar amount allowed for 2005 is $14,000
or $18,000 if you are over 50.
Long-term
Growth
All of
these options except the Roth IRA will reduce your immediate
income tax obligation. But the biggest advantage may
be that the funds are allowed to grow without being taxed
each year. This can dramatically increase your return.
For example, if you are in the 33% tax bracket, you would
need a 15% return on a taxable bond to match a tax-deferred
yield of only 10%.
Money
withdrawn from a tax-deferred account is subject to taxes
at the time of withdrawal, plus a 10% penalty if you are under
age 65. Health Savings Accounts, however, do allow you
to take out funds any time to be used to pay for medical expenses,
including medications, dental, eye glasses, alternative treatments,
and other health related expenses.
More information
about how HSAs work, along with instant quotes on qualifying
high-deductible health plans, can be found at:
HSA
for America
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