Medical Savings Accounts

Medical savings accounts combine high-deductible health insurance with a savings plan similar to an IRA. In 2004 Health Savings Accounts were Introduced as an optional replacement. A Medical savings account may be rolled over into a Health Savings Account. Click here for information on Health Savings Accounts

If you are too young for Medicare and are self-employed or uninsured, a Medical savings account can pay your medical bills until you turn 65. You are also eligible if you work in a company with 50 or fewer employees and have no other health insurance.

Insurance policies for individuals must carry a deductible of $1,750 to $2,650 ($3,500 to $5,250 for families) in 2005. When you open an account for yourself, you can contribute to the Medical savings account up to 65% of the deductible, 100% of your net self-employment income or 100% of your wages, whichever is least. The contribution limit rises to 75% of the deductible for family policies.

You deduct contributions on your federal income-tax return (see IRS Publication 969 for details - click here to download). Withdrawals you make to cover out-of-pocket medical expenses are tax-free, and your investments grow on a tax-deferred basis.

Withdrawing from your Medical savings account for any purpose other than medical expenses or because of disability will trigger a 15% penalty. But once you turn 65, you can withdraw money for any reason without penalty. Withdrawals are taxed as ordinary income.

With a Medical savings account, as with an IRA, you must name a designated beneficiary. When a spouse inherits an account, it becomes his or her own, and the funds continue to compound on a tax-deferred basis. If you name someone other than a spouse, the account ceases being an Medical savings account on your death and its value is taxed to the beneficiary.

If you are interested in rolling over your Medical savings account, please contact us at Advanced Corporate Planning.