GETTING STARTED Life Insurance Made Simple Smart Shopper's Guide to Auto Insurance Fill the Holes in Your Homeowners Insurance Buying Your Own Health Insurance Health Savings Account Answers Why You Need Long-Term Care Insurance MORE... INSURANCE TOOLS How much should I put in my flexible spending account? Estimate your medicare prescription drug savings How much life insurance do I need? How can I reduce mortgage insurance costs? Recent Columns Going Into Overtime - Feb. 3, 2005 Don't Delay Starting Your HSA - Jan. 31, 2005 Stocks Still Tops for the Long Term - Jan. 27, 2005 'One for All' Works for IRAs, Too - Jan. 24, 2005 Get Out of Bankrupt Shares While You Can - Jan. 20, 2005 Insuring a Car You Don't Own - Jan. 17, 2005 MORE ...

ASK KIM
Switching to Health Savings Accounts
by Kimberly Lankford

I have a medical savings account and I want to switch to the new health savings account. When and how can I do that?

Don't worry about making the switch, for most MSA participants it should happen automatically. But keep your eyes open. Many new providers are expected to jump into the market, so you might find better services.

The new health savings accounts were created in the medicare law President Bush signed December 8. The nuts and bolts are still being put together so there aren't a lot of specifics available. From what I could gather, though, the new HSAs will replace MSAs starting January 1. Any money in your MSA account will automatically rollover into the new HSA tax-free. But check with your plan administrator to see if it has any special requirements or paperwork to fill out.

One thing is certain, and that is HSAs will be open to many more people than medical savings accounts were. In fact, anyone under age 65 can contribute to an HSA if they buy a high-deductible health insurance policy. The policy's deductible must be at least $1,000 for individuals; $2,000 for families.

More demand means more competition among plan providers, and several additional companies are expected to introduce HSA plans in early 2004. So you can expect plan providers to try to distinguish themselves with lower fees and better service.

Health Savings Accounts will offer big tax advantages, especially if you are relatively young and healthy. You can contribute up to the amount of the deductible to an HSA, but no more than $2,600 for individuals; $5,150 for families. And you can add an extra $500 if you were born before 1950 to help with health care costs in retirement.

The best part is that funds not used in one year can roll over to the next to help pay for future expenses. And earnings within the account will compound tax-free.

The contribution is also tax deductible -- even if you don't itemize -- and you can withdraw the money from the HSA tax-free for your out-of-pocket medical expenses. Although you'll have to pay taxes on the money plus a 10% penalty if you withdraw it for non-medical expenses before age 65. The penalty disappears after that, giving you another source for tax-deferred retirement savings.