Do I Need a Health Savings Account?

Health Savings Accounts (HSAs) are still relatively new, so the jury is still out on their effectiveness. They do, however, provide an interesting approach to health care planning. Considered by some to be a type of "Medical IRA," the HSA is designed to cover lower-cost, routine medical needs, while

a high-deductible, low-premium ($1,000 individual, $2,000 family) health insurance policy will cover major medical needs. There are few restrictions on who can own one, meaning you don't have to be earning a certain amount (as with an IRA) or be self-employed. You just can't be covered by another health plan.

As to whether you need an HSA, it will depend largely on what you currently have. If you're self-employed and are shopping for a health care plan, an HSA can offer some benefits. First there are tax-deferred savings. As of 2006, you can contribute tax-free up to $2,700 for an individual and $5,450 for a family. In addition to the tax benefit, you can contribute to your HSA for a given year up to April 15th of the following year, when your tax return is due. Contributions can come from the account holder or the account holder?s family.

Another significant advantage of an HSA is that unlike a Flex Spending Plan, where you need to spend all the money each year, you can carry the money forward and build up your savings. However, a Flex Spending Plan does not require that you have a high-deductible health insurance plan.

Until an insurance deductible is met, the plan will provide tax-free dollars to be used for eyeglasses, medications, routine doctor visits, lab expenses, psychoanalysis, and so on. The idea is to grow the money in the account, so in time it will cover the deductible, while your annual contribution can grow through investments.

For a couple who has neither health insurance nor kids, an HSA may be a useful means of putting away savings that will grow tax-free. So by the time there are kids, and they're their scraping knees and requiring pre-camp physicals, there will be a substantial amount of money in the account to cover the deductible.

While HSAs have been slow to roll out of the gate, they will very likely gain momentum as they are offered by insurance companies as well as banks and brokerage houses. Of course, the investment choices and fees will be key factors in determining how popular they become.

For families with young children and therefore numerous medical needs, an HSA will probably not be the best choice. They are more labor-intensive, and the high deductible means $2,000 out of pocket. In addition, there will be a very limited opportunity for savings to accumulate with the ongoing medical costs associated with having young children.

For more information on HSAs, visit the U.S. Department of the Treasury Web site.