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HSA’s: Healthy Retirement Saving
Episode 10425th April 2023 • Financial Life Planning for Busy Parents • Mike Morton, CFP®, RLP®, ChFC®
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I’ve talked about Health Savings Accounts (HSA’s) in the past but it was time for Matt Robison and I to revisit one of my favorite retirement accounts. You read that correctly, HSA’s are great vehicles for retirement savings. Here’s the four W’s:

  1. What: What is a Health Savings account? It is an employee benefit intended to offset health care costs of high deductible insurance plans. Once opened, employees and employers can contribute to this account (more on this below). The money can be used now to pay for out of pocket medical expenses such as co-pays, prescriptions and even certain over-the-counter items such as sunscreen OR it can be saved to pay for medical expenses incurred in the future and to reimburse for expenses paid during the eligible period.
  2. Why: Why open an HSA? It’s simple: Contributions made to the account are tax free. Eligible withdrawals are tax free. And all money earned in the account incurs no tax burden. That is the triple tax benefit!
  3. How: How do you open an HSA? Have a chat with your company’s HR department. Evaluate your options. Choosing an insurance plan for your family that works for your current needs is the priority. If your employer offers a high deductible plan with an HSA and you have the means to cover your health care expenses, open the account. Contribute the maximum per year (often employers will contribute to these accounts as well so be sure to take advantage of FREE MONEY). Invest the money in the account in a low cost index fund. Let the money grow while you collect receipts for your eligible medical expenses. In 10-20 years, use all that cash to buy yourself a new knee or hip or reimburse yourself for all those kids’ urgent care bills and pay NOTHING to Uncle Sam.
  4. Who: Who can take advantage of this amazing benefit? Anyone working for an employer that offers an HSA. Check with your HR department today!

Tune in to hear more details about this savvy retirement savings strategy.

Learn more about Mike and my services at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/

Are you ready to create your ideal lifestyle? Let’s Connect.

Transcripts

Matt:

This financial planner is telling you don't save your money in a 401k, he actually has something better for you to do. This is the mike Morton podcast, Financial Life Planning. I’m Matt Robison, with your host, Mike Morton who is the owner of the podcast and my guest, Mike, how are you?

Mike:

Always good to see you. I did not say don't save your money in a 401 K, are you sure that's what I said?

Matt:

I'm pretty sure you said that you should take fistfuls of cash, go downtown, and make it rain like literally just shower yourselves in dollars. Oh, no. All right maybe I misunderstood you.

Mike:

No, no, you’re supposed to put them on the bed and roll around in the cash. It's perfect.

Matt:

Yes. It's like McBain says on The Simpsons, how do you sleep at night? On a pile of money with many beautiful ladies? You are not suggesting that what you are suggesting is that there's something better to do than save for retirement in a 401k. Really?

Mike:

In fact no, I mean somewhat really. But here's the upshot, the health savings account, Matt, so what I'm trying to, what I'm trying to get at here is you should use the health savings account, the HSA account as a retirement account. Don't be a fool and get fooled by the word health, in the health savings account and think you should be spending your health expenses today. No. That's the fools game, don't do that. Save the money in your HSA for your retirement.

Matt:

I see, so don't judge a book by its cover is what you are saying. First of all, that's the stupidest vice ever, right? Like cover is a great way to find out what's inside a book. What you're saying is that when we call it a health savings account, I think we've talked about this idea before. That's a misnomer, it's much more of an, it was, it may have been intended originally for health savings, but there's a lot more going on. You heart health savings accounts, right? You think they're awesome, why are they awesome?

Mike:

Yeah, so we did talk about this you know, briefly in one of our most recent episodes, but I looked back at the feed and we haven't dived into the topic of using the HSA for a little while. So I thought, and I get this question all the time Matt because it is a strategy that I really like, I thought I would just cover that today, the Why, and then some of the nuts and bolts about doing it, the health savings account. The reason this is my favorite account is you never pay taxes on the money. Everywhere else in your life whenever you make some income or you get some gain, the US government and state governments are there. Hey, you know, we'll take a little bit of that that gain, that income, you made some money. But this is the only account where the IRS has rules where you can use this, uh, and never pay taxes on the money.

Matt:

That's amazing. So what you're saying is there are two sure things in life, death and taxes, and you found a way out of one. What's the way that we can prevent people from dying?

Mike:

That’s a different episode Matt, maybe next time!

Matt:

Different episode. That's why you need to subscribe to Financial Life Planning. Okay, so lest my little joke at the top, send people truly in the wrong direction, you do like 401ks I mean they are great for…

Mike:

Love them. Love the 401k, and we've talked about this in the past we'll probably do another episode, Matt, in the feed in the future about what we call the waterfall, where to save the next dollar. Hey Mike, if I have like another dollar, where should I save that? And the first place is of course, any really high interest debt, I'm not talking about, I'm just saying saving in this episode, but that's always a place to start. If you have any high interest debt, you want to get rid of card debt, you know that’s what comes to mind. But then when you're ready to save, the first place that you want to look for is an employer retirement, often a 401K plan. And the reason why is because many employers will match some of your initial savings. You know, 3%, 6% of what you save. And that's just free money. You're just doubling your money. And so we definitely want to take advantage of that. So the first place to save is in your 401k up to the match. Okay, but after that, the next place to look is either gonna be an HSA or I do love the Roth IRA, so I kind of make it 50/50.But one of those two is where you want to save the next amount. And today we're talking about the HSA.

Matt:

Got it, so a future episode here is going to be a Kuta style deathmatch between the Roth IRA and the HSA. And two funds enter one fun, that sounds like a lot of fun. Okay, so 401k just distinct that point for a second, 401k is awesome, because if your company will do this, and they'll match free money, it almost sounds like one of those too good to be true type things. It's like you can double your money, you can actually can double your money. So do that, like even I am lucid enough to understand free money is good. All right. But that said, there are advantages to the HSA so like, I've done that right. I've done the 401k match my company says we'll give you up to 3% or up to 5%. So you know, that's standard, right? Like, maybe it's full up to 3%, partial up to 5%. Great, I've maxed out those dollars. But then back to that waterfall, you said that there's like, ways to decide on your next dollar. And you're saying, Stop there. Now look at the HSA.

Mike:

That's right, yeah. So you do the match, get the free money, but then you want to look at your individual retirement accounts, the Roth IRA or traditional IRA and your HSA saving there before maxing out your 401k. The reason why is you just have more control. The HSA we're going to talk about today has better tax benefits. So that's that's why we say the HSA, but even the Roth IRA, if you had a Roth 401k, you're like, why don't I just put in the Roth 401k? Why put it in the Roth IRA? Seems like it's kind of the same, you just have more control over your IRAs than you do your 401ks. And so that's the reason to save the money especially when it comes to a Roth IRA, there's even more rules. You can use it for all kinds of stuff and pull the contributions out if you have to so it's more flexible.

Matt:

Why do you never pay taxes on your HSA? I know that this is getting to your whole, don't be fooled by the fact that it says health but um, that's weird, why?

Mike:

Well, that's that's in your domain Matt, you worked on Capitol Hill I don’t know why they decided to, you know, make it never pay taxes. I have no idea. But you know, I've always said… triple tax benefits and maybe people get that, but a lot of people probably glaze over like, okay, that sounds better than double tax benefits, but I don't really know what that means. But, you know, in today's episode, right to stop, you never pay taxes, on the money flowing through your HSA, you never pay taxes.

Matt:

I actually do like your branding around you never pay taxes better than triple tax benefits because triple tax benefits sounds like you're coming to market with seven minute abs and someone’s going to say what about six minute abs. It's like, how what about quadruple tax benefits? Can't I get another one? Oh alright, we'll just let that question be begged. I actually told this story in another episode, I'm not gonna repeat it and belabor it here you just have to pick your way through the awesome Mike Morton podcast feed to find that incredible backstory of why Congress decided to do this incredible thing. It's you get a get out of jail free card, no taxes for you. But okay just walk me through this so I can get, conceptually no taxes is better than some taxes, is it, really a substantial difference.

Mike:

Yeah. So here's what happens. So you, let's just talk about the different places you could save that next dollar really briefly and then I'll dive into some of the, you know, how to use the HSA cause we want to get to that, like how we're gonna actually, you know, do this and never pay taxes on the money. Your traditional 401k, your 401k is pre-tax. And so you don't pay the taxes now. So it's great if you put in a chunk of money, then you can save on taxes today. So right now in the HSA, you can put in $7,300. So you put in you know, in your 401k instead, you save the $7,300, you get to not pay taxes. Now if you put that in a 401k, that's great. And so you'd save a couple thousand dollars and the Roth, you're thinking, oh, but Roth is really great Roth doesn't save that couple thousand dollars. So right off the bat, HSA better than the Roth account because you'd be paying taxes on that money. Okay. The second thing is taxes on the other end when you take the money out, when you take it out of a traditional account, that's when you're gonna pay taxes. Could be thousands of dollars or tens of thousands once it's grown it could be $10,000, you're paying taxes. Whereas the Roth, you don't have to pay it there. It's great. But the traditional. The traditional 401k you're paying $10,000 in taxes 20 years from now. HSA? nope, no taxes. So better than the Traditional 401k, better than the Roth, you don't pay taxes now. Better than the 401k, you're not paying taxes in the future. It's better than just saving it in your checking or savings account. Because that account, you're paying taxes every year those interest and dividends you know? And everyone's filling out taxes right now Matt cause we're recording this like four days before taxes are due. So you have interest and dividends.

Matt:

By the time people hear this it’ll all be over. But here's the great thing about taxes. It's like appetizers, another one is coming, right up!

Mike:

That's right so you know it's better than those taxable saving, you know, the checking or saving or brokerage account cause you're constantly paying taxes. It's got to drag every single year. It's kind of one of the worst places to be saving money. And so the HSA beats that one too. So that's why we say triple tax benefits, but much better. You're never paying taxes and that's how it beats the traditional 401k, it beats the Roth, and it beats just your brokerage account.

Matt:

I also think I see what you just did there, if I'm counting right, you had three things there right? Like, was that the triple tax benefits, so you have tax savings now, Tax savings later. And like the creamy Oreo center along the way in the middle, you save on taxes. So you're like, what is what are we talking about, like dollars?

Mike:

Oh, I mean this is where it's kind of hard to predict, because what you want to do is invest the money, right? So I told you $7,300 is what is a family limit for, um, last year. So you could save a couple thousand dollars on taxes by not paying taxes on that $7,300 if you're in the 24% bracket. So yeah, you get a couple thousand savings that you, but you, you know, you get that in the in the traditional right we just said, oh yeah, traditional same thing. You don't have to pay taxes now, so that's really nice. But then depending on what you invested in, right, and it grows tax free, it could be tens of thousands of dollars from a single $7,000 contribution over next 20 years, you could save over $10,000 just in taxes just from that one yearly contribution. And you can do this every single year.

Matt:

Wow. And then so the, so it's $2,000 right up front, just in this example, $10,000 later. And then along the way you don't have that drag, you're talking what an another $10,000?

Mike:

Yeah, that'd be a long tax drag. So, you know, the tax drag we should have an episode on this, Matt, because people don't quite realize that saving in your checking and savings brokerage account, I just said was kind of the worst way of saving money. That's why, you know, when financial planners are talking. It's like, Use your HSA, use your IRAs, use your 401ks. Like you know, we have this soup of, you know, different account types and you want to use them all because the taxes are massive man. And if you just save $5,000 in that brokerage account and you invest it for the future, the drag, I'm using the word drag, that compounds massively over 20 years you know, we'll put a pin in that, Matt, we should, we should go through some of these different types.

Matt:

That's actually. No, totally. That's actually much worse than what I thought you were referring to when you're talking about tax drag, which is your taxes getting dressed Judy Garland tunes. So the moral of the story here though, those triple tax benefits maybe, I don't know, maybe I'm back to that branding, that it has its charms. Because in your numerical example, if I'm following you correctly, the simple choice, that waterfall, it's okay, I've maxed out on the 401k now I can save up to $7,300 this year. I'm gonna do it in HSA, that’s one choice to put that $7,300 will save you $15,000 under your example in taxes. That's unbelievable it's like you're saving $7,300 and by not paying taxes, you're making another $15,000. It's like you're tripling your money.

Mike:

Yeah. That's exactly right, man. It's crazy. But then again, remember a stick of gum is gonna cost, you know, $50 at some point.

Mike:

Well, again, in the long run, we're all dead, except if we use that one weird trick that you're going to tell us, So stay tuned baby. All right. I feel I should give a legal disclaimer. We're not actually going to tell you how to live longer.

Mike:

Wait, hold on a sec. I know all kinds of tips and tricks about how to live longer live healthier. Don't you know the ascension theory where if we can just add a year of life every single year, you've reached escape velocity and no one ever dies.

Matt:

Is that what happened in that documentary, The Highlander?

Mike:

Yeah, it’s the documentary. It was kind of different. It wasn't so much scientific in that case. Just the last sore

Matt:

Potato potato. All right you've sold me that I want to triple my money. I want to put in $7,000 and somehow magically end up with $22,000 ahead, better off in 20 years, how do I do it?

Mike:

So first and foremost, this is tied to your health insurance and health insurance accounts. So health insurance first. All right, disclaimer, like always get the right kind of insurance for you and your family based on your needs. Alright, lots of employers offer multiple different types, you know, so there's some review, there's open enrollment and all that stuff. I've reviewed tons of these plans, Matt, so always look at insurance first for you and your family based on your needs. But some of the insurances, high deductible plan, can come with an HSA and so that's what we're looking at when you're comparing potential options for you and your family. If there's one, a high deductible health plan with an HSA, it'll have that phrasing in there with HSA. Just look for those HSA, compare that, and if it can be an insurance that's going to be right for you and your family, I highly recommend getting high deductible health plan with an HSA account. All right, so the HSA comes only with those types of insurances.📍 Are you ready to create your ideal lifestyle? Let's discover what's most important to you and design a plan to have more of that in your life. Go to meet Mike morton.com. All one word. Meet Mike morton.com.

Matt:

So that's a really big caveat here though, because for many people they don't want that kind of, that's the whole point of the uncertainty that you will face. A large medical bill and some of these high deduct… what that means, a high deductible you can explain better than I, but a high deductible plan means that you could be hit with a major medical expense and have to pay a lot of that out of pocket. And the reason I said I wasn't going to get too much into why Congress set it up this way, but that was ostensibly the is that you could save your own money. And instead of having insurance cover it and all that goes with insurance pooling and risk spreading, instead, you could save now and spend your own money later. So if you make this decision and you go down this road, I think the way you worded that is extremely important. You need to make sure that you're comfortable and fully understand what goes with the choice of a plan like that and the fact that it is a trade off and that you would be having a high deductible plan, and maybe that is good for you.

Mike:

Yeah, I'll mention two things though and then we got to move on cause we could spend all day with like the insurance question, like what's kind of, what are the caveats? Pros and cons. One, companies often put money into the HSA for you. So for taking that trade off, like, Hey, I might owe more out of pocket, but your company's giving you a few thousand dollars. Okay? So it might come out kind of even for you personally, even if the deductibles higher. The other thing is, Matt, when you look at the premiums and deductibles, I find a lot of times it's not that. Okay. In terms of your total out of pocket, it sounds like you're saying, oh yeah, your deductible is higher so if you have medical expenses, you are going to be paying more to hit that deductible, but when you factor in the premiums that go along with it, it might not be. So really like, that's why the high deductible plans are actually pretty good looking because the premiums are really low. Your company's kicking in some dollars. So anyway, check 'em out.

Matt:

Right. No, there could be situations. Absolutely. I'm not trying to. I'm not trying to extol the virtues of maximizing the level of insurance and optimizing for low deductibles. That's not right for everyone. And there are certainly going to be listeners and viewers in the situation where given their medical profile, it's a very appropriate choice. It just may not be, it's an important caveat, it just may not be for everyone.

Mike:

Yeah and the sad part is like, we don't, it's hard to analyze. Do the best you can and try to spend some effort. But anyway, if you can get, you know, check your choices. If you can, look at the high deductible with an HSA, go for that if you can, if it makes sense for you and your family, then how do you use that? So now you have this HSA. Remember, an HSA health savings account is your… it's owned by you. So it's kind of like an individual retirement account or a brokerage account. It has your name on it and any dollars that are in there are your dollars so it's not like the companies, you know, or the 401k that's kind of tied to the company. It's your account. So even if the company contributes money or if you contribute money, then it's just all a hundred percent your account like you own that thing. The company might put in money, and then you can also put in money either from your paycheck or at the end of the year or throughout the year. And I recommend maxing out the amount that you can put in between your company and yourself. There's limits every year they change. So you know, it was $7,300 last year for a family. $3500 or $3600 for an individual. You got to look it up every year, but maximize those contributions every year because you can't go back and add more to it. So that's step two. You got the high deductible with an HSA, you got the account open, your employer's putting in some money. And you want to make sure you contribute the maximum amount each year.

Matt:

Great. And now, so now you've got it. You're set up.

Mike:

Yeah, so now you got the account in your name, you got the money flowing in there. Now we want to invest it for the future. We don't want to leave that just sitting in cash. So all these places, health equity or, um, I’m blanking on a bunch of the names there's a bunch of different ones. So wherever it is, you have your login, you can see the they'll also have choices. You can invest the money. Alright. So highly recommend if you're going to do this for long term, you have to know your own risk profile, blah, blah, blah. Caveats, disclosures, but you can invest this for the future, like you do your 401k, so you can put money in low-cost index funds. There'll be a variety of them, choose which one's appropriate for you, you can invest this money for the future. You know, we were just throwing out like, hey, maybe you're gonna spend it in 20 years from now, so go ahead and make investment choices make sense for you and in low-cost index funds. And that will stay in there, you know for 5, 10, 15, 20 years. So pretty simple. So that's same as kind of your 401k. IRA got the money in, you made the investments, you do it once a year, you know, every quarter, whenever the money gets put in there, boom. Just adds more investments.

Matt:

Account max out.

Mike:

Yep. Account max out. Invest. Then finally, you want to save receipts for current medical expenses. Now with this account to get the tax benefit on the way out the way in, no taxes, investing, no taxes to get the tax benefit when you withdraw the money needs to be for a qualified medical expense. Matt, we're currently like pretty healthy guys, right? Do you think the two of us are gonna have medical expenses down the road, maybe, 10, 20, 30 years from now?

Mike:

I need a knee replacement five years.

Mike:

Exactly. So I think I'm pretty sure, you know, we got death and taxes I'm also sure that health costs are rising and we're going to continue to take advantage of needing health insurance, you know, paying for health costs in the future. So we'll definitely have a need for this money. Alright, so that's one. You can use it for those future expenses and you're probably going to have stuff that you're gonna be paying for. The other cool thing, Matt, is you can pay yourself for previous medical expenses if you have the HSA, so not like if you're opening it this year, you can't do it for things two years ago. But today you've got the account, you opened it, you're putting in money, you invested it, you're saving your receipts for current medical expenses. And I put it in kind of the bigger expenses, like if you have a bigger bill, you know, take a picture of it, just throw in a digital folder or a photo album or whatever, and label it and down the road five years from now, 10 years from now instead of paying yourself the thousand dollars, instead of paying that medical bill today, a thousand dollars, you pay it out of just your brokerage or checking account. You've invested the money, it's going to double or triple over 10, 20 years, and then you're gonna pay yourself back that thousand dollars. So you save all your receipts and you can pay yourself back. You can withdraw the money and pay yourself back for medical expenses that you had while you had the HSA.

Matt:

That's it. This does require, look, your first two steps not that hard caveat understood, you've got to make that decision about the type of health if you've gotten that decision, maxing out your contributions, not that hard. Selecting the investment, not that hard. The one thing this does require, from you, it sounds is a little bit you've gotta hold onto so there's a little bit of, you've gotta set up a system. This isn't quite as, fire it and forget it.

Mike:

Yeah, that's exactly right so that one is a pain. So you could do, you know, you can set up something that you just kind of do it every time, it's like, just if there's major stuff, you know, thousands of you know, we'll take pictures of that and kind of keep keep track of that. So whatever works but it adds up over time. I mean thousands of dollars a year, if you've got multiple kids, you've got stuff going on saving those receipts in 10 or 20 years, you could have $30,000 of regular kind of expenses, that you can, again, pay yourself back. You invested the money, allow it to grow, you can pay yourself back. So that one is more of a pain, but it's a really great use. Then finally, as we're getting into the end here, what I want to highlight is we said, yeah, Matt and I are gonna have medical expenses in the future. We're definitely going to be able to use that money. Mike, what if there's money left in my HSA, like, what if I did such a great job? I saved it and my investments were crazy good and there's money left over.

Matt:

So you avoided taxes but you didn’t avoid death.

Mike:

Yeah, that's right. Exactly. So you have leftover money and you just don't have the medical expenses or whatever, in the worst case scenario, this works just like your traditional 401k. Okay, so in the worst case scenario, the worst case being, I have money that I didn't expect to have left over. We talk about this with the 529’s. This is not a very bad scenario and no one’s ever run across Matt and has said, Mike, I have a real problem, I have an extra $50,000 I was expecting to have spent, you know. So in the worst case, it's just like your traditional 401k. You put the money in tax free, it grew tax free when you withdraw it you pay taxes at that time, but no penalty. Okay, so no penalties or anything, that just works just like your traditional 401k would have.

Matt:

Wow. so there really is like I don’t know, get out of jail free, but it's you have a free path essentially to, no harm, no foul. You just, you pay the taxes and it's as if you hadn't done this whole maneuver in the first place. There’s not really a downside.

Matt:

Correct. Small caveat, you have to be over a certain age to be able to do that. So if you were like, three years from now, I just need the money, that's the other thing is like, make sure all of these accounts, all right, when we talk about 401K’s and IRAs and HSAs, when you put money in, it can be harder to get it out in the near term. Okay? And there could be penalties associated with it. So make sure that you have other buckets of money, like if I just told you to pay your medical expenses from your checking or savings account. So make sure you have money to be able to do that each year, right. That’s a big caveat too. Make sure that you know you have a plan for where the money is going. Take advantage if you can, cause you're getting major tax benefits. But make sure that you have other accounts that you can be spending in the near term or from your income or whatever it is.

Matt:

Awesome. Alright, lot to chew on there definitely some homework. And look, there, there are steps and some major decisions including around your health insurance to make around this. So obviously, as always we want to reinforce that, you should talk to a financial advisor, get, the kind of advice that you need to set this up. Don't take our word for it, but definitely continue listening to the shows, especially the upcoming one, about how you can live forever. Mike Morton, thanks so much

Mike:

Thanks Matt, thanks for joining us on financial planning for entrepreneurs. If you liked what you heard, please subscribe to and rate the podcast on Apple, iTunes, Google Play Spotify, or wherever you get your podcasts. You can connect with me at LinkedIn for Morton financial advice.com. I'd love to get your feedback. If you have a comment or question, please email me at financial planning pod@gmail.com. Until next time, thanks for tuning in. This recording is for informational purposes only and should not be considered for investment advice. Opinions expressed as our the date of recording. Such opinions are subject to change. We do not guarantee the accuracy or completeness of the data presented here.

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