The recent Medicare bill passed byCongress has created a new investmentopportunity called healthsavings accounts (HSAs), which will allowyou to invest additional money on a tax-deductiblebasis. The bill seeksto empower individuals to proactivelyseek to reduce their health care expenses.
With an HSA, the minimum deductiblefor self-only coverage is $1000,while the deductible for family coveragemust be at least $2000. You are thenallowed to set up a side fund, which is anHSA equal to your deductible amount,not to exceed $2600 for self-only coverageplans and $5150 for family coverageplans. Taxpayers aged 55 and older areallowed to contribute an additional $500per year ($1000 for family coveragewhere both spouses are aged 55 orolder). If you are aged 65 or older, youdo not qualify to contribute to an HSA.
You receive a tax deduction for yourHSA contribution and your distributionsare tax-free when used for qualifiedmedical expenses. If you take a distributionfor anything other than qualifiedmedical expenses, that distribution willbe subject to ordinary income taxes plusa 10% penalty if you are under age 65.Investing in an HSA does not interferewith your ability to invest in a traditionalor Roth IRA.
Piecing It Together
Qualified medical expenses includecopayments, coinsurance, prescriptionand OTC drugs, dental services, visioncare, and other typical medical-relatedexpenses. Funds can also be used to payfor long-term care insurance premiums(limitations may apply), COBRA premiums,and health insurance premiums, ifthe applicant is currently receiving unemploymentbenefits.
Let's look at an example of the bene-fits of an HSA. Assume you purchase afamily health plan with a $5000deductible, and then set up an HSA with$5000 in annual contributions. By increasingthe deductible to $5000, yousignificantly reduce your annual insurancepremiums (often more than 60%).If you were in the 28% federal incometax bracket and 3% state bracket, yourdeductible contribution would yield youa tax benefit of $1550, which effectivelyreduces your total cost of health insurancepremiums. If you invested yourannual contributions for the next 20years and earned 8%, you would createa nest egg of almost $250,000. Of course,you may need to spend some of thismoney on health care-related expenses,but in the accumulation years, the savvyphysician-investor might choose to paythose expenses with other availablefunds to preserve this wonderful, tax favoredinvestment program.
Currently, the number of custodiansoffering HSA plans is limited, but I expectthat to change as insurance companies,brokerage firms, and banks enter thismarketplace. Your investment optionswill be similar to those available underIRA plans. I also expect to see large corporationsoffering employees high deductiblehealth insurance options sothat they can take advantage of HSAs.Be sure to stop by your human resourcesdepartment for details about your options.For more information about HSAs,contact eHealth Insurance (800-977-8860; www.ehealthinsurance.com).
is the founder of The Welch
Group, LLC, which specializes in
providing fee-only wealth management
services to affluent retirees
and health care professionals
throughout the United States. He is the
coauthor of J.K. Lasser's New Rules for Estate
and Tax Planning (John Wiley & Sons, Inc;
2001). He welcomes questions or comments at
800-709-7100 or visit www.welchgroup.com.
This article was reprinted with permission from
the Birmingham Post Herald.
Stewart H. Welch III, CFP