Tax Exempt Savings Plans

There are three types of tax exempt savings plans: health savings accounts, retirement savings plans, and 529 savings plans for your child's education. These plans are very important because they allow you to save some of your income tax free, and sometimes even have it matched. These plans are designed to allow you to prepare for three of the largest expenses in your future: medical expenses, your child's college tuition, and your own retirement.

Health Savings Accounts (HSAs) are tax exempt savings plans that help you manage the cost of your health care by paying for medical expenses and bills from the account. One of the best parts about HSAs are that they collect interest over time. All withdraws, contributions, and even interest is tax free, up to a fixed amount, as long as they're used for medical purposes.

If you want to start a health savings account you'll need to apply for a HSA qualified high deductible health plan (or HDHP). Next, you open your HSA at a bank or credit union. Then all you need to do is make contributions to your account, up to the preset annual maximum set by the government. If you make contributions as an employee, contributions are tax deductible on your next tax return. If you make the contributions as an employer, on the other hand, contributions are exempt from federal employement taxes. When you have medical expenses, such as hospital or doctor visits, you withdraw money from your HSA to cover the amount. If you ever decide to stop your HDHP coverage you will still have access to your health savings account funds for medical costs.

There is a downside to HSAs, however. If you use any of the funds for non-medical reasons you'll have to pay both income tax on the amount and a 10% penalty. This doesn't mean you should be afraid to start a health savings account, however. They're a great way to make sure you have money for any medical expenses that may come up for you and your dependents in the future and save you money because you don't have to pay income tax on contributions and withdraws.