Archives for July 2010

Health Savings Accounts (HSAs) are a pretty nifty way to save money. In short, if you’re eligible, they allow you to use pre-tax money to pay for medical expenses. This is done in either of two ways:

1. Through making (pre-tax) payroll deductions directly through your employer, or
2. Through claiming an “above the line” deduction for the amount you contribute to your HSA.

HSA Contribution Limits

For 2010, HSA contribution limits are as follows:

• $3,050 for a person with self-only coverage, or
• $6,150 for family coverage.
• Also, if you’re 55 or older, you’re allowed to make a catch-up contribution of $1,000.

Note: Any contributions made by your employer count toward the annual contribution limit, thereby reducing the contribution that you can make.

Contributions for each year can be made up until April 15 of the following year.

HSA Eligibility

In order to be eligible to make contributions to an HSA, you must be covered by a high-deductible health plan (HDHP) with an annual deductible of at least $1,200 ($2,400 if it’s family coverage). The plan must also have maximum out-of-pocket expenses of less than $5,950 ($11,900 if it’s family coverage).

Also, you must:

• Not be enrolled in Medicare,
• Not be claimed as a dependent on somebody else’s return, and
• Not have other health care coverage (with a few exceptions).

HSA vs. FSA

Health Savings Accounts (HSAs) are often confused with Flexible Spending Accounts (FSAs). The primary difference between the two is that money contributed to an HSA rolls over to the following year if unused. In contrast, FSAs are “use it or lose it.” Any money left unspent in an FSA disappears at the end of the year.

The takeaway is that with an HSA you don’t have to play the game of guessing how much you’re going to face in medical expenses each year. For example, if your 2010 HSA contributions exceed your medical costs, that’s no problem. You’ll be able to use the remaining money from your 2010 contributions to pay medical costs in 2011 — or 2012, 2013, etc.

HSA Withdrawals

Money can be withdrawn from an HSA at any time, for any reason. However, unless the money is either a) spent on qualified medical expenses or b) used to reimburse you for qualified medical expenses, it will be subject to income taxes and a 10% penalty.

• Exception: If you’re age 65 or over, or have become disabled, the 10% penalty is waived, though regular income taxes will still apply.

Qualified medical expenses include those that would qualify for the Medical and Dental Expenses deduction, as well as non-prescription medicines.

Update: Beginning in 2011, over-the-counter drugs will not be eligible unless you have a prescription.

Investing within an HSA

Funds within and HSA can be invested in much the same way as within an IRA (though your investment options will be limited to whatever the HSA administrator chooses to offer). Of course, at any given point, it’s likely you’ll be spending the money within your HSA in the near future, so it’s usually a good idea to keep it invested in something very low-risk.

Earnings and growth within an HSA are not taxable — though again, if you take money out for something other than qualifying medical expenses, the entire distribution is taxable and potentially subject to a 10% penalty.

As complex and intimidating as taxation can be for most people, it’s even trickier for unmarried and same-sex couples, as there are additional pitfalls to look out for.

Estate Tax and Gift Tax

Property that passes from one spouse to another is not subject to estate or gift taxes. Unfortunately, for couples the IRS considers to be unmarried, when one partner inherits property from the other, the unlimited marital deduction does not apply.

The takeaway: For unmarried or same-sex couples with assets beyond the exemption amount, efforts to minimize estate taxes become even more important than they are for other couples.

Inheriting an IRA or 401k

The rules for an inherited IRA are different for a spouse beneficiary than for a non-spouse beneficiary.

Specifically, as a non-spouse beneficiary, you have to begin taking required minimum distributions (RMDs) in the year following the death of the original account owner — no matter how old you are. (In contrast, spouse beneficiaries can simply roll the inherited IRA into their own IRA and treat it as if they were the original owner all along.)

Takeaway: Don’t forget to take RMDs from an inherited IRA.

Early IRA Withdrawals

The rules for withdrawals from an IRA allow you to avoid the 10% penalty if you’re using the money to pay for higher education expenses or unreimbursed medical expenses that exceed 7.5% of your adjusted gross income. And, for most couples, the same exception applies if you’re withdrawing money to pay for your spouse’s medical or education expenses.

But again, because same-sex couples are not considered married, any IRA distributions used to pay for your partner’s expenses will be subject to the 10% penalty (unless, of course, you meet some other exception).

Takeaway: If you need to withdraw money from an IRA to pay for such expenses, be sure to take it out of the right partner’s IRA!

Have a Will, and Name Your Beneficiaries

This last point isn’t exactly a tax consideration so much as a general estate planning consideration. In short, for same-sex or other unmarried couples, a will becomes absolutely essential — even more so than for other couples.

The reason is that (in most cases) if somebody dies without a will, his or her assets pass on to his closest relatives. And, therefore, if your state doesn’t consider you to be married, your partner could inherit nothing if you die without a will, as everything will pass to your blood relatives.

Similarly, be sure to name your partner as the beneficiary for your IRA or retirement plan at work if you want to ensure that he or she will inherit those assets when you pass on.