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TAX TIP: FUND YOUR 2006 HEALTH SAVINGS ACCOUNT

April 10, 2007

Some taxpayers can still knock $5,000 or more off their 2006 taxable income without giving up the use of their money until retirement. These are taxpayers who had a qualifying "High Deductible" health insurance plan during 2006, but who have not yet made a contribution to a Health Savings Account.

Health Savings Accounts work a bit like old-fashioned individual retirement accounts, or IRAs. You can deduct contributions to the accounts, but the earnings accumulate tax-free until withdrawal. But unlike IRAs, you can always withdraw earnings from an HSA tax-free to pay medical expenses not otherwise reimbursed by insurance. That means your earnings aren't locked away until retirement like IRA earnings are. If you don't use them for health expenses, you can withdraw the funds for retirement like IRA funds.

To contribute to an HSA for 2006, you need to have had a qualifying high-deductible health insurance plan in place during the year. This means an deductible of at least $1,050 for individual coverage or $2,100 for family coverage. The maximum deduction for single-coverage taxpayers is the lesser of $2,700 or the annual deductible; for family coverage taxpayers, the deduction caps out at the lesser of the deductible or $5,450.

The deadline for 2006 HSA contributions is April 17. A number of Iowa financial institutions sponsor HSAs, including Iowa Savings Bank of Carroll. To claim the HSA deduction, complete Form 8889.

Link: IRS discussion of HSAs

Related: LAST GOP TAX BILL ADDS HSA IMPROVEMENTS

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Comments


Excellent post, Joe!

Two bits of clarification (if I may):

1) Unlike the Archer MSA, one need not have had the HDHP in place for the entire year to max fund the account, and

2) One need not have the max deductible to make the max contribution.

I especially liked this: "Some taxpayers can still knock $5,000 or more off their 2006 taxable income without giving up the use of their money until retirement."

It's an important distinction, and one which I fear a lot of folks miss. Thanks for making the point so well.


Hank, those are excellent points. The tax law eliminated the monthly proration and the use of the deductible as a ceiling for years after 2006.

Unfortunately, for years before 2007, the limits in the post applied; as the post is about the 2006 contribution, those were the limits I used.


Ooops! Should have read more carefully. You're absolutely right (of course!) about 2006 taxes.

Back to 1st grade for me!

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