Catastrophe Savings Account 101
If you live on the coast, you know that homeowners insurance is the best tool available to protect your home and family from hurricanes and other catastrophic events. Online tools like Insurify make it easy to compare quotes from dozens of home insurance companies with just a few clicks and to identify the best and cheapest coverage available.
Even the best home insurance policy won’t cover all your expenses, though. You’ll still have to pay out of pocket for your insurance deductible, and depending on your policy, this amount can be sizable. If you really want to be prepared, you also need to set aside a nest egg large enough to cover these costs.
Fortunately, some states have made it easy for residents to save—by opening a Catastrophe Savings Account (or CSA). CSA owners can contribute to these accounts to build a disaster fund and then use the money tax-free to pay for qualified catastrophe expenses. In some cases, states will even allow account holders to claim an income tax deduction for the contributions.
Currently, only three states (Alabama, Mississippi, and South Carolina) have laws relating to CSAs, although similar measures have been proposed in other states and at the federal level. CSAs function differently in each location, but they also share a number of similarities, which we’ve outlined below:
You must specifically label the account as a Catastrophe Savings Account, segregate it from all other accounts and use it only for this purpose.
You can withdraw funds only to pay for qualified catastrophe expenses.
You can only designate a CSA for your legal residence, and you and your spouse cannot have separate accounts. Sorry—no vacation homes allowed!
State governments cap the total contributions that you can place in a CSA. The amount is determined by your insurance deductible or, for uninsured property, the value of your home.
If you contribute more than you’re supposed to or spend CSA money on anything other than qualified catastrophe expenses, you could be forced to pay state taxes on those funds, along with an additional penalty.