by Archie M. Richards, Jr., CFP^®
March 29, 2004

Overall, last year's Medicare Prescription Drug Bill was a monstrosity. But one part was terrific: Health Savings Accounts. Take advantage.

You may adopt a Health Savings Account (HSA) even if you have an IRA, 401(k), or other qualified retirement plan. The level of your income makes no difference.

Here's what you need to qualify for an HSA:

• You must be younger than 65.

• You can't be claimed as a dependent in another person's tax return.

• You must be covered by a high-deductible health insurance plan (more below).

• You can't be covered by another health plan, such as your spouse's lower-deductible plan at work.

The high-deductible health insurance is what makes HSAs good public policy. Healthcare has become costly because, when you and I go to a doctor or hospital, the bills are paid by someone else.

When you buy food, you weigh the benefits against the costs. If steak is too expensive, you buy hamburger. But healthcare expenses are generally paid by insurance companies. The cost therefore doesn't matter. Only the quality counts. This is why overall U.S. healthcare costs have soared.

When you have a Health Savings Account, the first dollars of your healthcare costs each year are paid from your HSA. But tax advantages ease the pain, as follows:

• The contributions to the account are deductible in your income tax return.

• The accumulations within the account are not taxable.

• Withdrawals for qualified medical services are not taxable either.

The list of medical services that qualify is broad: Vision care, dental care, prescription drugs, certain nonprescription drugs, long-term care insurance premiums, long-term care services, and premiums paid for Part B Medicare insurance (not medi-gap insurance). If you're unemployed or disabled, you can even use your HSA account to pay for your health insurance premiums.

When your healthcare costs exceed the deductible in your insurance policy, the insurance company pays the rest. The higher the deductible, the lower the premiums.

If you're an individual, the deductible in your insurance policy must be at least $1,000. If you have a family, $2,000. But the amounts you contribute to your HSA and deduct from your taxable income can be larger: $2,600 for an individual and $5,150 for a family.

If you're at least 55 (but less than 65), you can deduct additional catch-up contributions in your tax return: $500 in 2004 (increasing in $100 increments each year to a maximum of $1,000 in 2009).

Let's say your HSA is funded, but you don't happen to need it for healthcare during the year. No problem; the money continues growing for your use later on. You own the account.

If you pay taxes on a calendar-year basis, you can make contributions to the HSA any time from January 1 to April 15 of the following year. Contributions can continue until you turn 65.

For purposes other than healthcare, withdrawals from your HSA are taxable. Prior to age 65, they're also subject to a 10 percent penalty. After 65, withdrawals for non-healthcare purposes remain taxable, but with no penalty.

Let's say an accident or disease strikes after you've set up an HSA but before you've funded it with enough to cover the deductible. You may purchase an inexpensive rider to the insurance policy. During the first year or two, the policy pays the difference between the amount in the HSA and the amount of the policy's deductible.

Insurance companies are the first to provide Health Savings Accounts. Banks, brokers, and mutual funds probably won't be far behind.

HSAs are good public policy and beneficial to each of us. Take advantage.

The American Institute of Architects has found that architect billings predict future construction activity. This makes sense. When you decide to build, the first person you call is an architect. The billings anticipate construction spending by 4-to-8 months.

Through February 2004, architect billings reveal that construction spending should hit bottom in April 2004. About 6 months later, "a rocketing through the gates."

I'll go for that.