Should You Consider an HSA?

The Tax Relief and Health Care Act of 2006 (TRHCA) that went into effect this year made it a bit easier for both employers and their workers and self-employees to obtain Health Savings Accounts, a kind of IRA for health care expenses.

Health savings accounts were created as part of the Medicare Modernization Act of 2003 but have not been wildly popular because they’re complicated. Anyone under age 65 who buys a qualified high-deductible health plan (HDHP) can open an HSA. However, you can still own an HSA and be covered under other types of insurance policies that cover liability, dental, vision and long-term care needs, as long as the same expenses are not covered by both your HSA and the insurance policy.

How do I find a qualified policy? If you’re employed, your employer obviously selects a qualified option and makes that available to you. However, for individuals or sole proprietors buying such policies, you need to put in some research to make sure you get the right plan for you. You need to ask if your current insurer has a qualified plan, and there are Web sites you can search for ideas -- www.hsainsider.com and www.healthdecisions.org.

Will I automatically qualify for the HSA option at my company? No. Under the new law, employers have the right to offer such plans to those who own 5 percent or less of the company or make less than $100,000 a year. However, if you are self-employed, there are no income restrictions.

What are the maximum contributions? In 2007, individuals can deposit up to $2,850 in their HSA, even if the minimum single person deductible of $1,100 is selected. Insured individuals with family coverage can deposit up to $5,650, even if the minimum family deductible of $2,200 is selected. For HSA holders 55 and up, they’re allowed to make an extra catch-up deposit each year until the date they enroll in Medicare. In 2007, the maximum allowable catch-up deposit is $800. This catch-up amount will increase to $900 in 2008 and will remain at $1,000 beginning in 2009.

How do I get started? The new law allows employees the one-time opportunity to roll over their existing balances in flexible spending accounts or health reimbursement accounts into an HSA. The new rules also allow a one-time opportunity for an individual to transfer in funds equal to the relevant HSA contribution maximum for the year.

If I find a policy, should I automatically buy it? No. Since this is a tax issue as well as an insurance issue, it makes sense to discuss this decision with your tax adviser or financial planner.

What’s the difference between an HSA and a medical flexible spending account (FSA)? One important difference is that HSAs allow balances to be carried forward year-to-year, growing on a tax-free basis as long as they’re used for medical expenses. On the other hand, Medical FSAs generally require that the money you contribute each year has to be spent by a particular date (yearend or otherwise) or you’ll lose it. But in certain cases, such as when you incur medical expenses early in a year, you can be reimbursed by your FSA without having to fully fund it – so FSAs might be a better deal. Get help from your tax or human resources professional.

Can I have both an HSA and a flexible spending account? It depends. In any one year you may maintain both accounts but each year the FSA must be used up and can’t be carried forward. You may want to split your money between both to cover non-qualified expenses under the HSA rules. If your FSA provides for limited reimbursement for items not covered by your health insurance plan (such as dental, vision, or wellness care), you can use an HSA for items covered by your plan and your FSA for medical expenses that are not. Obviously, double-check this with an expert.

What happens if I need to use my HSA dollars for any non-medical reason before age 65? You’ll get hit with additional tax of 10 percent, plus any withdrawals will be taxed at ordinary income tax rates. After age 65, you’re free to use the funds for any purpose without penalty, but non-medical withdrawals are still taxable.


August 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

Think it’s Time to Tap Your HELOC for an Investment? Get Some Advice First

Any bank or mortgage broker who wants to loan you money for a home equity line knows it’s in their best interest to lend right up to your credit limit. They make more money that way. Yet just because you qualify for a home equity line doesn’t mean you need to use it, particularly as a bank for investment purposes.

Quite a few things need to go your way for you to use your home equity line effectively. There’s plenty of risk in plowing loan money into investments that may suddenly lose their value if they mirror the Dow’s drop over recent weeks. While home equity loan interest rates may cost you less than borrowing from your investment brokerage firm by purchasing investments in a margin account, you still need to be very careful.

To borrow home equity effectively, you need stable interest rates and rising home values that go with a strong economy. Remember that mortgage professionals are not investment professionals or financial planners – that’s why they’ll always encourage you to borrow if you have the flexibility to do so. For balanced advice, you should consult a financial planner.

In all honesty, most planners would tell you that if you need to borrow from home equity, you may not be in the strongest financial position to make an investment in the first place.

It makes sense to go over a few home equity borrowing basics. There are two primary kinds of home equity debt. A home equity loan is a one-time, lump sum that is paid off over a particular amount of time with a fixed rate and number of payments. A home equity line of credit (also known as a HELOC), works more like a credit card because it has a revolving balance – interest is due on the outstanding balance and that rate may vary over time.

Here are the things you should discuss with a trusted financial adviser before you tap home equity to put in real estate, securities or any other form of investment.

Will your investment deliver a greater after-tax return than you’ll be paying for the loan on an after-tax basis?

Does your home equity loan or line carry an adjustable rate? If so, a jump in interest rates may make what you owe even more expensive and further offset any gains you make in your investment. If rates fall, it’s good news, but given current conditions, it makes sense to be cautious.

How much is your property appreciating each year in your neighborhood on average? Is it enough to further offset the cost of your investment? Keep in mind that no one is predicting the type of double-digit property appreciation we saw before 2004.

How will this loan work for you from a tax perspective? Keep in mind that home equity loans over $100,000 are generally not tax-deductible.

What if you need your home equity borrowing power later for an emergency (the real reason most of us should open a home equity line and then avoid using it)?

Could you handle that emergency if your borrowing was strained to the maximum?

How liquid is this investment? If you had a sudden major expense or lost your job, could you turn it into cash without major hardship?

How are your other debts? Do you have significant balances on credit card or auto debt? That may raise the rate you pay on your loan – another potential cut in your investment profit potential. As long as you can deduct the interest, you might just be better off consolidating and paying off debt rather than taking a flyer on an investment.

How close are you to retirement? From a cash flow perspective, will you be able to handle the loan payments assuming your investment using the home-equity funds doesn’t work out?

Home equity is a good option for many important financial goals, but you have to balance risk against potential reward. In most cases, it is always good to hold home equity in reserve for a real rainy day.


August 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.

Thinking About Going Back to College? Make a Plan First

You’re in your 40s, 50s or beyond and you’ve either always dreamed of going back to school or realized you need a degree or extra preparation to get to the next level of your career. The mid-career college plan should be very different than the one you and your parents had in place when you were 18 – and that’s probably a good thing.

A July/August 2006 story in AARP Magazine by noted workplace and career expert Rosabeth Moss Kanter pointed out that retirement-phobic mid- or late-career types may retreat to college campuses instead of the golf course to prepare for the next phase of their life. Why? They want to train for completely new careers in all-new professional fields or public service. According to the piece, “Traditional volunteering is not what leading-edge boomers have in mind. They want to be leaders and to help improve the world.” Education will be a part of that movement.

The back-to-school movement for older Americans is an interesting one, but it goes beyond purely financial considerations. It makes sense to discuss your ideas with a tax professional and a financial planner before you make a move:

Do you really need the degree? Depending on the field, many employers will look at an experienced worker and take their particular work and life accomplishments into consideration when hiring. An MBA or other advanced degree may be personally fulfilling, but you have to consider whether your future plans really require it and whether the degree will pay for itself in the end in salary, opportunity or both.

Are you planning to attend school while working or will you take time off? Going for an aggressive degree program while working full-time can be financially, mentally and physically draining. Obviously, if you plan to take a sabbatical and go to school full-time, that’s a more complex set of financial issues you need to consider well in advance, and you should get help planning for it. Beyond finance, you need to be prepared for the demands of school on your time with family, friends and your personal relaxation. Time is an opportunity cost you can’t get back.

Check your qualifications for federal and state tax credits. Both the federal Hope Credit and the Lifetime Learning Credit are among options you may consider to help cushion the tuition blow if you qualify – discuss these credits and other ways to afford college with your tax expert as well as your planner.

How prepared are you to take on debt? It would be wonderful to pay cash for a college degree, and with time and planning you might be able to do it. But if you need to take out debt to pay for your coursework, make sure your credit cards and other debt are paid off first. You’ll put yourself in the best position to afford any student debt you take on.

Will your company pay? Take advantage of every educational break you can take before you leave your company. If they require you to stay a certain amount of time after attaining your degree, work that into your plan.

How’s your retirement and health plan? It might seem like a good idea to raid the retirement plan or milk the home equity to go back to school, but you need to research whether that makes sense for you. Despite your current energy and determination, no one has a guarantee of perfect health through the last half or third of their lives. Also, you need to plan to keep funding retirement if you’re still working and managing your retirement plan if you’re heading back to school.

Consider a functional degree. All sorts of colleges – even the nation’s most prestigious schools – are considering abbreviated graduate and post-graduate programs that give students exactly the amount of education to upgrade their skills and head back into the workforce. If a one-year program will do, why pay for two or three?

Are your school choices friendly to older students? It’s your money. Make sure you’re attending an institution that considers its older students a valuable addition to its campus and makes you welcome.

August 2007 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by, a local member of FPA.