As planners, advisors, and CPAs, we all know that the Health Savings Account is the best retirement account out there. If you’re not contributing to one, you need to ask yourself – or your financial planner – why not, especially if you’re a high income individual or a business owner.
The HSA is the only retirement account that offers the triple whammy of tax deduction, tax deferral, and tax free withdrawals – and there are many ways you can use it that aren’t simply as a healthcare slush fund.
If you and your family qualify, there are likely surprising ways that you can take tax-free distributions. You can also quickly grow an HSA if you’re just now starting one, and though there are a couple of caveats, there is basically no reason not to make an HSA a major part of your retirement portfolio.
In this podcast interview, you’ll learn:
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Here we are. Welcome, everybody, to a brand-new episode of the Your Wealth & Beyond Podcast. I’m your host, Andrew Rafal. A pleasure to be here. It’s been an exciting end to the summer, to say the least. I know a lot of you may be listening to this after the fact but, man, our reality out there is definitely a reality show. Who would’ve thunk it, but I’ll tell you, the ratings are up across the board. I guess it’s a good time to be in the news media because every day throws something at you that you couldn’t even imagine. But I regress. This show isn’t about that. This show isn’t about the way my Brown’s lost last week in Oakland and I was actually there to witness it. We were in victory formation and then the NFL stole it from us but again, that’s a whole another diatribe.
Today, we are going to jump in feet first, maybe a belly flop, could be a Triple Lindy or a cannonball, but we’re jumping right in to talk about all things related to, bop, bop, bop, bop, bah, the health savings account, or more commonly referred to as the HSA account. And you know what, as planners, financial advisors, CPAs, those that are in the know, know that the HSA if you qualify for it, it is the pinnacle, the best retirement account out there. And if you are not contributing to it, you need to take a step back, you need to look in the mirror and you need to say why. Now, here’s a couple of caveats and we’re going to go through today some of the top 10 things to know about HSAs and then also some tips on how to get the distributions out tax-free that may surprise you.
[00:02:46] Andrew: So, the HSA, the health savings account, why it’s the pinnacle? Is that if you qualify, okay, and this is the big if, your health insurance plan, whether it be an individual plan or work plan has to be a high deductible plan. Currently, 2018, for an individual, that means an individual plan has to have a least a $1,350 minimum annual deductible. For a family, that number is $2,700. So, the rules are very specific about what plans qualify so ask your employer, ask the benefits department. If you’re an individual plan, call up the plan itself. So, that is very, very important. Secondly, there are certain limits to how much you can contribute. There’s two ways you can contribute. There’s you put the money in, or if you’re fortunate, a company may add some money but you can’t go past the maximum amounts.
So, foreign individual, 2018, the max you can contribute is $3,450. If you’re over 55, throw in another thousand on top of it. Families, $6,900. Again over 55, you can increase that. It’s called a catch-up, $1,000. So, when you put that money in, similar to your 401(k), similar to an IRA, similar to a SEP IRA, that money comes right off of the tops. So, it’s the deduction off the top line. So, if you think about it, you’re in the income bracket and let’s say you’re making $200,000 a year and you put away $6,900 into the HSA, you get a full deduction on that similar to your 401(k). Now, it doesn’t mean that you still can’t max out your 401(k), put $18,500 in there, $6,900 in the HSA if you have a family.
[00:04:47] Andrew: If you’re over 50, you could put $24,500 in your 401(k) and $7,900 if you’re over 55. So, that money goes in. Now, depending upon the plan that you have, you have the ability to invest it. There’s different choices. So, it’s not just a savings account but you can invest it in the same type of funds that you can in your 401(k) or a 529 plan. Very important to know what those options are because really what you want to think of this, the real pinnacle to the benefit of getting tax deduction, then the money grows tax-deferred and then ultimately at some point if used for qualified medical expenses, the money can come out tax-free. So, if you listen to why we call it the pinnacle is that you get the triple whammy, the triple whammy.
Okay. You get the tax deduction, tax deferral, and tax-free. It’s the only retirement account out there that gives you all three, a 401(k) or an IRA gives you the first two, but then when the money comes out in most cases it’s going to come out and you’re going to pay taxes on it. In a Roth situation, you do not get the first. You don’t get the tax deduction but you get the tax deferral and its tax-free when it comes out. So, when you think about the triple combo, that’s why we call it the Cadillac of retirement accounts. So, very, very important there. Now, a lot of you out there would use it and I made this mistake too, not a mistake, but I look at now a different option to really maximize the HSA but what a lot of people do is they’ll put it in, they’ll put the amount in and then they just take it right back out for prescriptions, for copayments, reimbursements on surgeries. You can do that.
[00:06:44] Andrew: Man, so it’s not a bad thing after all. You’re putting in of the $6,900 as a family, you get a tax deduction. So, you’re saving potentially $2,000, $3000, and then you take it right back out and it comes out tax-free. Not a bad idea. But more and more of us are under the mindset that we want this money in the years while we’re retired when we’re going to have more medical expenses. So, why not think about it more of a longer-term account, put the money in, grow it, and then have it be tax-free later. We’re going to start seeing more and more of this as clients come our way, we’re starting to see more and more of these clients with tens of thousands if not pretty soon six figures in their HSA account. So, you can use it either/or but think of it, if you can think of it as maxing that puppy out, put in as much as you can, and then letting it defer as long as possible.
Now, a couple of things in regards to how this can be utilized is that if it’s your plan and in a family situation we can use the tax-free distributions for a spouse, for a dependent. This is true even if your spouse or child is not covered under the HSA compatible high deductible insurance so very important there. Now, also, when we look out at when you start taking this money out of your HSA, one of the unique things is that it can come out to reimburse you for medical expenses that were done in prior years. The key parameter here though is that the qualified medical expense had to have happened, had to have occurred after you had set up your HSA. So, let’s talk real world example. Today it’s 2018. Let’s say you had set up your HSA plan in 2015, and in 2016 you went to the doctor and you had to get your knee scoped.
[00:08:43] Andrew: Well, that payment, whatever your insurance company made you pay back in 2016, you can actually reimburse yourself today in 2018 out of your HSA. So, it’s very flexible in that regard but again, the most important component there is that medical expense had to have happened after your HSA was taken out. You can also name a beneficiary to your HSA. If it’s your spouse, the HSA will become theirs and continued to be used tax-free for qualified medical expenses so it’s similar to an IRA transfer, a spouse will continue, and so those type of things. So, HSA, the Cadillac of the retirement plans, we recommend. If you can qualify and you do have the money that can be put away, you got to do it, especially if you’re a business owner, especially if you’re high income. If you’re not doing it, go ask your CPA or your financial advisor, “Why am I not doing it?” and they may tell you, “You should be doing it.” “Well, why didn’t you tell me to do it?” “Well, I didn’t really know that you had it.”
Well, we got to ask these questions. As advisors, you got to ask your clients these questions, and clients, you got to ask your advisors, you got to be proactive. A lot of times everybody’s reactive. Now, when we look at some of the ways on how we can get the money out of the HSA, there’s the basic which we talked about, take the money out for qualified medical expenses and it’s more than just doctor bills. This means you could take out tax-free distributions from your HSA to pay doctors and hospital bills but also medical supplies, prescription copayments, dental care, vision services, even in some cases, chiropractic expenses. So, there’s a full gamut on how this money can be used, and it’s something that, again, you can use it as a slush fund. What goes in, comes out. When it comes out, you got a lot of different ways on how it can come out.
[00:10:42] Andrew: You can take these tax-free distributions from your HSA to pay for your spouse or child’s medical expenses like we talked about. So, that’s the one that a lot of people don’t realize, even if they’re not on your plan. Now, here in 2018, you can take from your HSA, talked about this a little bit before to pay for expenses from a previous year. Again, as long as those expenses were incurred after your HSA was taken into account. So, you could reimburse yourself later. That’s again that key of that compounding. Let the money grow and then reimburse yourself at another time, and years from now. Even if you no longer have a high deductible plan and you’re no longer allowed to contribute your HSA, you can keep your HSA and you can continue to take the tax-free distributions from it to pay for those medical expenses for you, your spouse, and any of your dependents. So, just because you’re not contributing doesn’t mean that you have to disband the account.
A lot of you remember the flexible spending accounts. Those had to be used towards every year. In this case, the HSA can continue to live on even a lot of different circumstances. Now, I hear something once you reach or enroll in Medicare so reach that magic age of 65, you are not allowed to contribute to your HSA. You are not allowed to contribute to your HSA but you can still take tax-free distributions for qualified medical expenses. And here’s another real big benefit of the HSA when you reach 65. Normally, you can’t use your HSA to pay for insurance premiums. You can’t use it to pay your health insurance premiums. But after the age of 65 or at that age and you’re enrolled in Medicare, you can take money out of the HSA to pay for Medicare premiums excluding Medigap.
[00:12:48] Andrew: So, you can use it for Medicare premiums excluding Medigap so that’s something that a lot of people don’t realize that you can do. And as we talked earlier at the HSA, you can list your spouse and after your death, he or she can maintain the HSA in their name and can continue to access the funds. Now, there’s one little caveat to an idea. It’s not so much of a home, home run but there’s a certain rule that allows you one time to fund your HSA with qualified retirement money meaning coming from an IRA. So, that money can come out of the IRA. It can directly transfer. You want to do a trustee-to-trustee transfer but it can go to fund your HSA account so where that could work well is if you took out money and you took $6,900 from an IRA where you got a tax deduction. Of course, that money is going to go into the HSA. There’s no taxable consequence right then and there.
And then when that money comes out on like an IRA which is going to be taxable, you’ve now taken IRA money, moved it to the HSA, and now with that HSA that money can distribute out for qualified medical expenses, for medical bills, for prescription drugs, for Medicare payments. The list goes on and on and on. But that money comes out tax-free. So, that’s a little-known fact. It’s not always in everyone’s best interest to take from retirement money and to move it there but in a sense, both accounts are retirement vehicles. One is just used for the healthcare. One is more used for living expenses which ultimately include healthcare. So, today’s episode’s going to be short and sweet. If you have the ability to contribute to an HSA and you’re not doing it, you need to find out why you’re not doing it, meaning look to yourself and say, “Can I afford to do it?”
[00:14:44] Andrew: You know, the other caveat is that if you are getting a 401(k) matching, make sure you at least put enough in to get the matching but then you may want to look at what the additional amount of money that you can save and try to earmark a little bit into the HSA account. The reason we’ve talked about tax deduction, money grows tax-deferred, money comes out tax-free, pretty good deal, right? So, make sure that you look at that, you understand first if you’re allowed to do it. That means you have to make sure your plan meets the minimum annual deductible, meaning it’s a high deductible plan, and then also ask your company, “Will they fund your HSA for you?” Some companies will do that. Now, you can’t go above and beyond the contribution limits. Unlike a 401(k) where if you put in your 18,5 and they’re matching you 5%, you can go over that 18,5. In this case, you are maxed out at that limit.
What we’re hoping that the government will do and the treasury and so forth will increase the amount that we can contribute to an HSA. Why not, right? Let’s contribute more. Maybe they’ll change it where then companies can match. Why not put the onus on us to save if we can and make it beneficial by giving us some tax breaks? Because at the end of the day, that’s going to take some pressure off the government. So, that’s what we’re hoping for, but until that time, I would highly advise if you’re using your HSA as a slush fund, see if you can stop doing that and look at longer term, letting that money grow, and compound, and be there for you. But most importantly, if you have the ability to do an HSA and you’re not, make sure that you take a good hard look at it because it’s one of the best vehicles out there that will help us all pay for that big wildcard which is healthcare, which we don’t know what will be in the future.
[00:16:41] Andrew: So, that’s it today. If you have any questions at all, underneath the show notes, there’s going to be the ability to contact us. We can run an analysis. We can walk through with you how much it’s going to be in tax savings. We can just go through general questions that you may have. That’s what we’re here for. If we don’t know the answer, we’ll tie into somebody that is a license in the healthcare space but that’s what we’re here to do at Bayntree. That’s why we do the Your Wealth & Beyond Podcast. It’s to get out good information to you, that way you can make good decisions. All right, guys. Well, I’m signing off. We’ll get together again later this month for a new episode of Your Wealth & Beyond. Make sure to subscribe to our show and let your friends and family know that this show’s out there. We really appreciate all of the feedback and the downloads, and the show just keeps getting stronger and stronger every single month so thank you, guys.
And if there’s ever a guest, if there’s ever a topic, if there’s ever a question, just reach out to us at firstname.lastname@example.org. We’ll make sure we get the answer to you specifically. We’ll make a whole segment on it here at the Your Wealth & Beyond Podcast. I’m Andrew Rafal. I appreciate the time. We’ll talk soon.
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