Medical Savings Account

A medical savings account is a way for you to save for future medical expenses without the burden of federal tax. Similar to having an IRA, your medical savings account is sheltered from federal tax deductions, only that the money must be spent on qualified medical expenses.

In a way, opening a medical savings account is better than purchasing health insurance coverage. For instance, instead of purchasing an insurance plan with a high price tag and low co-pay, you can simply buy a low-cost policy with a high deductible. The low-cost policy will pay for any “big” bills you have while the difference can be saved on your medical savings account to be applied to the “small” bills.

Tax Privileges

The great thing about depositing money in a medical savings account is that the amount is totally 100% tax deductible. What’s more, you can easily access your medical savings account by writing a check or by using your debit card in order to pay for medical bills. Plus, the payment for the medical bills is tax-free, and may be made even for services that are not traditionally covered under insurance, such as dental or vision care.

What You Don’t Use, You Keep

Having a medical savings account is like having your own bank savings account. What money you do not use for payment of medical bills, you can use for other purposes, such as coverage for future bills or for supplemental retirement. As you continue to make contributions on your medical savings account, the money grows on a tax-favored basis.

How to Establish a Medical Savings Account Plan

Under the Medicare bill, signed into law by President Bush on December 8, 2003, you can establish a medical savings account by signing up for an HSA plan or Health Savings Account plan.

Here is a three-step way to establishing an HSA medical savings account plan:

• STEP 1: Purchase a “high deductible” health insurance policy. Make sure that it meets the specific HSA requirements in order to qualify.

• STEP 2: After your “high deductible” policy is issued and in force, the next step is to establish the actual HSA medical savings account. As to where you should open the account, do it at a qualified financial institution. Different financial institutions offer different investment options. You can choose between fixed accounts, mutual funds, stocks, or bonds.

• STEP 3: Start making contributions to your medical savings account. You can pay any amount to your account since there is no minimum contribution required. There is, however, an annual maximum limit, just like an IRA.

REMEMBER: In a medical savings account, what you don’t use, you can keep. Just like an IRA, your balance continues to grow while retaining its tax-deductibility status. And just like an IRA, once you reach the age of 65, you can use the account as you would a traditional IRA and subject only to income tax reporting.