Self-Employed View:

Medical Savings Accounts

One of the biggest concerns a self-employed individual has is medical benefits. Compared to his corporate buddies, the self-employed individual has been paying two to three times as much for medical benefits.

The solution to this problem for the self-employed is to open a medical savings account. It can reap benefits for self-employed individuals with businesses that employ less then 50 people. In utilizing this option, you will contribute pre-tax money to pay for medical insurance.

This is how it works. You receive a tax deduction for all the money that you contribute to the medical savings account each year. You use this account to pay off your medical expenses by withdrawing funds from it. If your medical expenses go over your insurance policy's deductible amount, the policy comes in and pays for the additional costs. If you don't spend the entire amount you have contributed to the account, the difference stays there and earns you interest.

There are some limitations to this:

• $1,500 to $2,250 a year for an individual and $3,000 to $4,500 a year for a family is deductible on insurance policies. If you go over that amount, the policy maker can cover up to 100% of the expenses or they could set up some kind of a co- payment program. The government does have a limit on out-of-pocket medical expenses (deductibles plus co-payments) with a maximum of $3,000 for a single person and $5,500 for a family.
• You can also make pre-tax contributions to the account in order to use the money to pay off your medical expenses. Individuals can contribute 65% of the deductible and families can put in about 75%. So an individual can contribute $1462.50 out of a deductible of $2250. If you use this money, you pay after tax dollars until you reach $2250. If you don't use up the money in your medical savings account, it rolls over into the next year.
  
• A 15% penalty exists for money you withdraw from the account for non-medical use unless you are over 65 years old the penalty doesn't apply. The money is still taxable regardless of what you use it for.