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Do the tax benefits phase out at certain income levels?
Unlike many other tax breaks, there aren't any income limits. Anyone under age 65 who buys a qualified high-deductible policy can open an HSA.
What's the difference between the new HSAs and the flexible spending accounts? It seems they are for the same purpose.
The tax benefits of both plans are quite similar, but there are several differences. The biggest and most important difference is that your HSA balances can roll over from year to year and continue to grow tax-deferred.
Money in your flex plan must be spent by the end of the plan year or you lose it. That may sound like a big negative, but flex plans can save you a lot of money even if you don't spend every nickel. Also, you can open a flexible spending account only if the plan is offered by your employer, and you don't need to have a high-deductible health insurance policy. (See "Flex plan options when you leave your job.")
If my employer offers both, can I fund my flexible spending plan, too?
No. You cannot have an HSA if you use a flexible-spending account to pay health-care costs or if you have other medical coverage (say, through a spouse's policy). However, if your flex plan restricts reimbursements to wellness care (such as annual physicals) and vision and dental care, you can have an HSA, too.
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You can keep the money in an HSA account even after you leave that job, similar to a 401(k). But you will get stuck with a 10% penalty -- plus an income-tax bill -- if you use any of the money for nonmedical expenses before age 65.
What happens if I want to withdraw the money for nonmedical expenses after age 65?
You won't be hit with the 10% penalty if you use the money for nonmedical expenses after age 65, but you would still have to pay income taxes on the money. Keep in mind that you can continue to withdraw money from the account tax-free for qualified medical expenses after age 65.
Can a couple who is planning to retire early open an HSA?
Sure. Anyone under age 65 can contribute to an HSA if he or she buys a high-deductible health insurance policy, and you can contribute an extra $900 in 2008 if you're 55 or older. This catch-up contribution amount will increase to $1,000 in 2009. You can't make new HSA contributions after age 65.
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Pros and cons of health savings accountsNBC's Robert Bazell looks at a health-care program that's been touted by President Bush but has been slow to catch on.
No. Your HSA contributions won't affect your IRA limits -- for 2008, $5,000 per year or $6,000 for those over 50. It's just another tax-deferred way to save for retirement.
This article was reported and written by Kimberly Lankford for Kiplinger's Personal Finance Magazine.
Updated Sept. 9, 2008
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