Saturday, October 27, 2007

Year-end Health Savings Account Strategies

2006 is just around the corner, and there are several issues to consider if you currently have a Health Savings Account (, or are planning on getting one in 2006.

Contribution Limits and Deadlines

100% of the deposit you place in your HSA is deductible on your federal income taxes. All but a handful of states also make HSA contributions tax-deductible on state income taxes. If you are looking to reduce your 2005 tax burden and/or put away more money for retirement, your HSA is the first place you should put your money if you have not yet maximized your contribution.

The maximum you can contribute to your HSA in 2005 is the lesser amount of your deductible, or $2,650 for singles and $5,250 for families. Individuals who are 55 or older may contribute an additional $600.

Note that contribution limits are pro-rated, based on the number of complete months during the year in which the taxpayer has a qualifying health insurance plan. If you obtained a qualifying health insurance plan in 2005, you may use our HSA Contribution Calculator ( to quickly determine your maximum contribution.

You have until April 15 (or later if you file for an extension) to make your 2005 contribution. If you do not fully fund your account for the current year, you cannot make a catch-up contribution for 2005 after this deadline. However, you can reimburse yourself in later years for qualified expenses incurred in 2005, even if you do not have the funds in your account to reimburse yourself at this time.

In 2006, the maximum annual HSA contribution will go up to $2,700 for individuals and $5,450 for families, and people 55 or older will be allowed to contribute an additional $700.

To maximize your tax benefit for 2006, it is important to have your HSA-qualified health coverage in place no later than January 1.

Record Keeping

In order to pay for a medical expense from your HSA, it must be a qualified expense. In previous issues ( I have discussed some of these qualified expenses, including dental expenses, eyeglasses, chiropractor visits, over-the-counter medications, and sometimes even nutritional supplements. Please see our qualified expenses ( page for more details.

Now is a good time to make sure you have an accurate record of your medical expenses for the year. Make sure you separate the expenses for which you have reimbursed yourself from your HSA from those that you paid for out-of-pocket. You'll want to keep receipts for all medical expenditures paid from your HSA with your 2005 tax records. Place the "non-reimbursed medical expenses" in a separate file, keeping them with the concurrent year's tax records in whatever year you decide to reimburse yourself.

Over-funded Accounts

The penalty for over-funding your HSA is a whopping 6%. I actually over-funded my own account, because I had set it up in January yet made the maximum deposit as if it had been in effect since January 1. (Yes, I should have known better!)

You have until April 15, 2006 to withdraw excess funds for the 2005 tax year to avoid the penalty. My HSA administrator fortunately notified me of my mistake, but they had no obligation to do so. It is your responsibility, so make sure you check into this if you think you may have over-funded you account.

2006 Deductible Changes

The minimum deductible for HSA-compatible health insurance plans in 2005 was $1,000 for individuals and $2,100 for families. In 2006 this will increase to $1,050 for individuals and $2,100 for families. If you currently have an HSA-qualified plan with the lowest eligible 2005 deductible, that deductible will automatically go up on January 1 to the new minimum.

Strategies to Maximize Your Tax Benefits

There are basically three different strategies you can take when deciding how to fund your health savings account.

1) Put no money in the account, except when you incur a medical expense. This strategy allows you to legally "launder" any money used to pay medical expenses. In other words, by depositing money into your HSA, then immediately withdrawing it to reimburse yourself for medical expenses, you are making your medical expenses all tax-deductible. You may want to use this strategy if you are on a tight budget and want to keep your cash outlay as low as possible.

2) Fully fund the account, or at least put in as much as possible based on your budget. Take money out of the account any time medical expenses are incurred, and let the rest grow tax-deferred. This strategy will maximize your tax deduction, while making your HSA funds available to pay any non-covered medical expenses before your deductible is met.

3) Fully fund the account, but pay all medical expenses from a non-HSA account. Reimburse yourself for medical expenses at a later date. This strategy will allow you to maximize your tax deduction, and will also allow you to maximize the tax-deferred growth of your HSA. You can then reimburse yourself, tax-free, at any time in the future for medical expenses incurred over the ensuing years. (For an example of this strategy, see Maximize Your HSA, Issue 3-

To maximize the potential growth of your funds, you may want to make your 2006 deposits as early in the year as possible. Any growth in your account is tax-deferred, like an IRA. I plan on making my deposit the first week in January.

If you do not yet have an HSA-qualified health insurance plan, please give us a call at 866-254-5121 as soon as possible. By getting your HSA-qualified health insurance in place by January 1, not only will you be able to maximize your tax benefits, but you also may be able to lock in 2005 rates for the next 12 - 24 months.

To your health and wealth,

Wiley Long President HSA for America

P.S. Every December I write out my goals and objectives for the next 12 months. Finance and health are two areas I always spend some time thinking about. By staying healthy, I expect to build a nice second retirement account with my HSA. Next month I'll cover some lifestyle strategies that you may want to adopt as part of your New Year's resolutions, that have the potential to dramatically improve your health (and wealth) over the coming years.

About the author:


Young, Self Employed, No Accounts And No Savings. How Did I Get A Mortgage?

I was having considerable problems getting a mortgage to buy my first home about four years ago. If I was to believe everything I had heard, I was the ideal candidate for a mortgage - young, a first-time buyer and with an annual income of about �30k. Easy!

No, not easy, actually. Being young with a leaning towards enjoying myself, I had no savings - nothing to use as a deposit. But what about these 100% mortgages I had been hearing about? Surely I qualified? Oh, there was something else - I was also self employed with no accounts.

Self employed with no accounts and no savings.

Could I get a mortgage? It was virtually impossible. Not a single High Street lender would give me a mortgage. Even my bank who have had my services for ten years turned me down; even though my bank knew exactly how much I earned each year and how much I spent each week; even though my bank knew that making the monthly payments on a repayment mortgage would not be an big problem for me.

Then I heard about Self Certification Mortgages.

What is a Self Certification Mortgage? It's essentially a mortgage whereby you decide whether or not you are capable of making the repayments. And that is when the penny dropped, because you see the entire process of applying for a mortgage is premised upon an institution (such as your bank) deciding whether or not you are able to make the monthly repayments.

And what is the formula for working this out? Well, if you are employed it is your salary - a bank will lend you, say, 3 or 4 times your annual salary. Normally they will ask you for a small deposit, say 5%, to demonstrate that your intentions are serious.

Obviously, if you are self employed, and particularly with no accounts, you often do not have an annual salary and you are unable to demonstrate regular monthly income. Many self employed people - notably me - live hand-to-mouth, regularly waiting for reluctant clients to settle outstanding invoices. So how can your ability to repay a mortgage be judged? I discovered that self certification was the answer - i.e. YOU. You make a judgement as to whether or not you are borrowing too much money and whether or not you will be able to afford the monthly repayments. After all, if you are bright enough to run your own business, manage your own tax affairs, handle purchasing and invoicing, surely you are bright enough to work out whether you can repay your mortgage!

Think about it - conventional, salary-based mortgages are judged on the basis of what a person has earned in the past, but a person could be made unemployed within hours of securing a mortgage. On the other hand, Self Certification puts the onus on you predicting what you will earn in the future. Sure, you could go out of business, but a salaried person could also lose their job.

So I thought, well this is good, but I bet that a Self Certification Mortgage is the stuff of loan sharks, with huge interest rates, crushing monthly repayments and Guantanemo-style penalties.

But there was something else I discovered about mortgages. Although the High Street is swamped by lenders, there are only actually a very small number of 'actual' lenders: the majority are intermediaries acting on their behalf, because the number of mortgage applications is so great that intermediaries are required to perform the process of judging each applicant and assessing risk.

So I discovered that whereas a High Street lender would turn me down, a smaller lender might accept me. But get this: the mortgage that I actually received from the small lender at the end of the day was exactly the same as the mortgage which had been refused me by the High Street lender! Only the forumla for judging my ability to repay the mortgage was different, not the mortgage itself!

So what's the catch with Self Cerftification? There is always a catch in my experience, and in this instance it was a very big catch. Whereas a regular mortgage requires the borrower to contribute a deposit of, say, 5%, my Self Certification Mortgage required a deposit of 15%. Fifteen percent!! Of course I can see why they ask for this, why if you are not being judged using the conventional formula you are expected to show some serious committment. But I didn't have any savings. I was young and self employed for crying out loud.

So what did I do? Okay, I would not recommend this to everybody, but I was desperate for my own home and I knew that I could afford the repayments. I took out a Personal Loan shortly before my mortgage application and, supplemented with a timely invoice payment, I was able to pay the deposit and afford the key refurbishment costs on the property (roof, re-wiring, plumbing etc).

On the High Street this would be called a Home Improvement Loan and acquired AFTER you have obtained a mortgage and purchased the property. I simply borrowed a little more in the form of a Personal Loan before I had acquired a mortgage. I was fortunate in that I could afford to carry the costs of these repayments for the forseeable future and I had bought on a rising market - the value of my property was already more than the mortgage and personal loan combined before I had even finished the refurbishment (ie. 4 months after buying the property). I would not recommend this to everyone, and you have to be very, very clear about how much you are borrowing and what the total repayments will be.

However, getting on the property ladder and having my own home was the most important thing to me, and it just goes to show that if you look beyond the High Street you can actually find the same or similar financial products but with less of the hassle. The High Street had always made me feel inadequate, a financial failure

You might be interested to know that, because I was still looking for the catch in my Self Certification Mortgage, I went to a respected, independent financial advisor recently (on the High Street as it happens) and asked if I should change my mortgage to something better. His advice was that I had got a very good mortgage deal and that I should stick with it for the forseeable future. So I have.


About the Author:

Richard Evans now assists in the running of a financial introducer and the loan and mortgage directory Please give these sites a visit, especially if you are actively looking for a Self Cert Mortgage in the UK.


Your Child's College Education Savings Plan, Discover 4 Great Options

With higher education costs increasing at double digit percentages an effective college savings plan for your kid's education is becoming much more critical. Most parents will find that their kid's future college costs will be much more than they have planned. This leaves many kids to be faced with obtaining financial aid to compensate for a portion of their higher education costs. This article will explore the pros and cons of 4 common college savings options. This article will also seek to show which of these 4 options are a better option if part of your kid's higher education costs are to be funded by financial aid.

529 College Savings Plan: Since January 2002, 529 college savings plan have become a new option for achieving tax free college savings. These plans are state sponsored investment programs that offer special tax treatment. It allows just about everyone to save for their kid's college education. While there are many benefits of a 529 college savings plan, perhaps the most important is that your investment earnings are tax deferred if you use the funds for qualified education expenses. Additionally, another big advantage is that the maximum amount you can contribute to a 529 savings plan can go as high as hundreds of thousand dollars but be aware these are based on your States specific guidelines. If for some reason you do not use the investment funds for college, you can still withdrawal your investment earnings, but you will have to pay a federal penalty of 10% and federal income taxes on your earnings. The penalty can be waived if your child receives a college scholarship, or in the event your child becomes disable or dies.

A 529 plan can typically be easily purchased through an investment broker or mutual fund company like Vanguard or Fidelity. Please be aware that one of the biggest disadvantages of a 529 plan is that investment options can sometimes be limited. However, as 529 plans become more popular it is likely that more plan options will open. For instance, the State of Ohio just announced the option for bank CDs and saving accounts for 529 plans. One last main advantage of a 529 college savings plan is that the money in the plan is classified as a parents assets so less that 6% of the value counts against your kid's eligibility for financial aid.

Coverdell Education Savings Account (CESA) (formerly known as an Educational IRA): A Coverdell Education Savings Account is a savings account created as an incentive to help parents and students save for higher education expenses. A Coverdell Education Savings Account is easy to set up at most financial institutions and banks. A Coverdell Education Savings Account is similar to a 529 college savings plan, but different in the contribution limits. With a Coverdell Education Savings Account you can only contribute $2000 per child per year and to qualify your adjusted gross income must be less than $110,000 if you are single and less than $220,000 if you are married filing jointly. For financial aid eligibility a Coverdell Education Savings Account is classified as a parent's asset so less that 6% of the value counts against your kid's financial aid eligibility.

UGMA/UTA Custodial Account (Uniform Gifts to Minors Act/Uniform Transfers to Minors Act): A UGMA/UTMA account allows someone to make gifts to a minor without setting up a trust. While there are benefits to a UGMA/UTMA account the first limitation is that these types of accounts offer very little federal tax advantage. Secondly if your child is 14 or under only the first $800 of income is tax free, the next $800 is taxed at your child's tax rate and after that there is no tax benefit at all. The other big disadvantage is that an UGMA/UTA Custodial Account has to be set up in your child's name. This can create a big problem if your child needs financial aid since all of the assets will be reviewed at a 35% rate. As a result, a UGMA/UTA Custodial Account is not advisable for those who may need to qualify for financial aid eligibility.

The main advantage of a UGMA/UTA Custodial Account is that there is no limit on the investment contribution and it is very easy to set up at most major financial institutions including some insurance companies. However, as can be seen above the disadvantages of a UGMA/UTA Custodial Account far outweigh the benefits.

Taxable Investment Accounts: Taxable investment accounts can be a broker account, a mutual fund, a certificate of deposit or just a regular savings account. Essentially it is just a regular account that earns taxable interest, or investment income. A benefit of a taxable investment account if set up in the parents name is that the assets are classified as a parent's asset so they do not count as a negative in the financial aid formula. Additionally, taxable investment accounts offer lots of flexibility, and are easy to set up at any financial institution. However, the big limitation to taxable accounts in saving for college is that they offer no tax advantage for college savings.

In summary, a solid savings plan for college is a very important undertaking for parents to consider. The above 4 education investment options can be highly useful in the college planning process. Furthermore since some of these investments offer substantial federal tax advantages and do not count against financial aid eligibility they can maximize parent's investment resources.

This article may be freely distributed as long as the copyright, author's information and one of the below live links is published with the article:

About the Author
Copyright (c) 2005, by Jay Fran. Jay Fran is the creator of - A website that offers new and used motorcycle loans, and motorcycle refinancing.