Monday, August 4, 2008

HEALTH SAVINGS ACCOUNTS

Larry, I recall you said something about health insurance at one of your seminars. I believe you were talking about tax free medical expenses. Would you mind providing me with this information again? Thanks - Anna

Anna, Health insurance has certainly been a hot topic in the national political campaigns. What you're referring to are Health Savings Accounts (HSAs). With an HSA, distributions to pay qualified medical expenses are tax-free.

A tax law enacted a little over a year ago - the Tax Relief and Health Care Act of 2006 - included several improvements for HSAs.

When it works, roll over funds from an IRA to an HSA. The transfer is tax-free. Then you can take tax-free distributions from the HSA to pay for qualified medical expenses. This special tax break (i.e., tax-free distributions to pay medical expenses) is only available to HSA owners. IRA distributions for medical expenses are taxable. But remember this: You can only do this once in your lifetime.

Similar rules apply to rollovers from a flexible spending account (FSA) or health reimbursement arrangement (HRA).

Ordinarily, a distribution from an IRA is subject to tax at ordinary income rates. But the 2006 law allows you to transfer IRA funds to an HSA - just once - completely tax-free. And, the usual 10% penalty on pre-age 59 1/2 withdrawals doesn't apply.

You can't roll over more than the maximum HSA contribution for the year. For 2008, the contribution cap is $2,900 for an individual; $5,800 for family coverage. Anyone over age 55 can put in an extra $900.

Remember: Once the rollover election is made, it's irrevocable. There's no going back.

Check out our website for more information on Health Savings Accounts: www.kopsaotte.com - Click on Forms & Publications on the navigation tool bar, and then select Health Savings Accounts.

Larry Kopsa CPA