April 29, 2025 • 16 mins
Health Savings Accounts (HSAs) don’t get much attention—but they should. With triple tax advantages (tax-free contributions, growth, and qualified withdrawals), HSAs offer a level of flexibility that’s hard to beat.
I break down how to use an HSA not just for healthcare today, but as a long-term planning tool. That includes how to qualify, contribute, invest the funds, and take strategic withdrawals.
I also explain why it’s worth tracking medical expenses—even if you don’t reimburse yourself right away—to create future options for tax-free income.
What you'll learn:
1. How an HSA can help reduce your lifetime tax burden and fit into a broader retirement strategy
2. Ways to maximize the tax benefits beyond just paying current medical bills
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Timestamps:
0:00 - How HSAs work
1:12 - Eligibility and contribution limits
3:19 - HSA details and nuances
4:36 - Timing flexibility
8:11 - Case study -- John
9:31 - Leveraging tax benefits
10:50 - Qualified medical expense
11:51 - Use HSA to the fullest extent
14:19 - HSAs in the grand scheme of things
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
I believe health savings accounts are one of the
most effective places you caninvest your money, but only if
you know the rules around how toproperly use them.
So in today's episode we'regoing to talk about health
savings accounts, how they workand some strategies some
little-known strategies that youcan use to maximize the tax
impact of everything youcontribute to your HSA plan.
This is another episode ofReady for Retirement.
(00:22):
I'm your host, james Canole,and I'm here to teach you how to
get the most out of life withyour money.
And now on to the episode.
Let's start by getting a quickrundown of how health savings
accounts, or HSAs, work.
With an HSA, any contributionsyou make are tax-free at the
federal level and they aretax-free at the state level at
all, but two states soCalifornia and New Jersey do not
(00:44):
recognize HSA contributions,but the other 48 out of 50
states do, and thosecontributions are tax-free.
Now these contributions alsocontinue to grow tax-free.
So with an HSA and we'll get tothis in a little bit you have
to keep some of your money incash, but you can invest the
difference.
You can invest the remainderand that money grows tax-free.
And then, if you're pullingthat money out for qualified
(01:06):
medical expenses we'll also getto that a bit later that money
comes out tax-free.
So what you essentially have isyou have a triple tax benefit
here of tax-free contributions,tax-free growth and tax-free
withdrawals.
And what I'm going to show youis how do you take most
advantage of this, in somelittle known ways, to maximize
the effectiveness of what thisaccount can do for you the of
this in some little known ways,to maximize the effectiveness of
(01:27):
what this account can do foryou.
The first detail to know at thisis are you even eligible for an
HSA?
To be HSA eligible, you have tobe enrolled in a high
deductible health plan.
Now, just because you believethat your healthcare plan has a
high deductible does notnecessarily mean that it is a
high deductible plan.
These plans will have minimumsfor the actual deductible
involved with it and they willhave maximums for out-of-pocket
costs, and the plan itself willsay whether or not it is high
(01:49):
deductible and whether it is HSAeligible.
But that's the first thing.
If you don't have a highdeductible health plan, you
cannot use an HSA or you cannotcontribute new dollars to an HSA
.
An HSA doesn't mean that it'san HMO or a PPO.
You can have an HSA with both.
The main thing that you need tolook at here is is this a high
deductible healthcare plan andis it HSA eligible?
(02:10):
The second detail that you needto be aware of is the
contribution limits, and paycareful attention to this,
because this is slightlydifferent than how something
like a 401k works.
If you have an HSA for anindividual only, the most that
you can put into that plan for ayear is $4,300.
If it's a family plan, the mostthat you can put in is $8,550.
But here's what's differentabout how these contributions
(02:31):
work when compared to somethinglike a 401k.
When you have a 401k and wetalk about contribution limits,
that is the amount that youpersonally can put in to your
401k.
Any employer contributionsdon't count against that limit
that you have for yourself.
With HSAs, however, this is atotal contribution limit.
So if you're single and youhave an HSA for yourself only,
(02:52):
and let's say that your employerputs in $500 to your HSA, that
$500 counts towards the $4,300limit, which means that you can
only put in $3,800.
So keep that in mind.
These contribution limits arethe combined amount that you and
your put in $3,800.
So keep that in mind.
These contribution limits arethe combined amount that you and
your employer puts in.
Another thing that's slightlydifferent than what you might be
used to with 401ks is with401ks, as soon as you are 50 or
(03:13):
older, you get to make acatch-up contribution.
The same concept applies withHSAs, but the catch-up
contribution is an extra $1,000and it's from 55 and older, not
50 and older like 401ks are.
So once you're 55 or older, youcan start making these catch-up
contributions to your HSA toget even more money into the
plan.
The next thing to note withHSAs is there's a lot of
(03:34):
confusion Now.
Sometimes people will ask isn'tan HSA one of those use it or
lose it accounts?
And the answer is no.
The use it or lose it accountthat people are typically
referring to is an FSA, aflexible spending account.
That is an account that youcontribute to it and you need to
use those dollars by the end ofthe year.
Otherwise those dollars go awayWith a health savings account,
and keep this in mind becausethis is going to tie into the
(03:56):
strategies we talk about here inone second.
With an HSA, any contributionsthat you make, those carry
forward with you.
You begin growing this accountbalance that you do not lose if
you don't use thosecontributions by the end of the
year.
Just a few more details, a fewmore things we want to lay the
groundwork on before we start totalk about the strategy around
HSAs.
But one other important thingto note is, unlike IRAs or Roth
(04:18):
IRAs, there's not an incomelimit.
It does not matter how much youearn.
You can make HSA contributionsat any income level, provided
you are enrolled in a highdeductible health plan.
So let's now get into some ofthe strategy here, some of the
things that you can do with yourHSA to significantly leverage
the tax impact that you havehere and possibly make this one
of the core assets that you haveto prepare for your retirement.
(04:39):
Now, before we do real quick,make sure that you subscribe to
this show.
If you're listening on YouTube,subscribe.
If you're listening on ApplePodcasts, on Spotify, wherever
you are, make sure that yousubscribe so you don't miss
future episodes.
So what can you now do withthese HSAs?
One really important thing tonote here that very few people
actually understand is you donot have to use your HSA funds
in the same year that you incura qualified medical expense.
(05:00):
So, as I mentioned at thebeginning, contributions to the
HSA are tax-free.
Growth is tax-free, with theexception of New Jersey and
California and withdrawals aretax-free, assuming you're using
those withdrawals or you'reusing that money that you pull
out for qualified medicalexpenses.
The beautiful thing is, youdon't have to align the year in
which the qualified medicalexpense is incurred in the year
(05:21):
in which you pull funds out ofyour HSA.
So, for example, let's assumethat I personally put $5,000
into my family's HSA this yearand let's also assume that this
year I incur a medical expensethat cost me $3,000.
What I could choose to do is Icould choose to pull 3,000 from
my HSA to pay for that medicalexpense, or I could simply use
my cash.
I could use money from my bankaccount to pay for that $3,000
(05:43):
medical expense and leave thefull $5,000 in the HSA.
Here's what that does.
Now my HSA can continue growingand let's assume that five
years from now, 10 years fromnow, I need some extra cash and
I'm trying to figure out whereshould I pull this from.
Well, in that year, even ifit's five or 10 or however many
years from today, I can stillpull that $3,000 out because I
(06:04):
incurred an expense, and that$3,000 that I pull out still
counts as a qualified medicalexpense.
Even if 2025 is the year that Iincur the actual medical
expense, I can pull the fundsout in 2030, 2035, 2040.
It doesn't have to correspondto the actual year that I
maintained or incurred theexpense.
Now pro tip.
This is why it's very importantto keep track of your medical
(06:26):
expenses.
If you're incurring medicalexpenses and you have a health
savings account but you're usingcash flow to pay for those
expenses meaning you're usingother assets outside of your HSA
keep track of that, becausehere's where the beauty comes
into play.
Let's assume that every yearfor the next 10 years, I incur
$3,000 in medical expenses andlet's also assume that every
year for the next 10 years, I'mcontributing $5,000 to my
(06:48):
family's HSA account.
So that's 10 years ofcontributions.
That's 5,000 per year.
So $50,000 of contributions.
But let's assume that thatmoney's grown because I've
invested it and it's now worth$75,000.
That's $75,000.
And of that $75,000, Iessentially have $30,000.
10 years of $3,000 per year ofexpenses.
I have $30,000 that I can pullout tax-free at any time.
(07:11):
It doesn't have to be at thatpoint for an actual medical
expense.
If I want to take my family ona really nice trip.
I have $30,000 of tax-freefunds there.
If I run into hard times and Ineed to pull money from
somewhere, I have $30,000 oftax-free funds there.
So this is one of the beautifulthings about health savings
accounts is you can use it tostart building this beautiful
portfolio, knowing that part ofthat portfolio can always be
(07:33):
tapped into completely tax-freein the event that you need it,
even if you don't have a medicalexpense in that year, assuming
you have incurred medicalexpenses up until that time.
Now I mentioned this brieflyearlier.
But one point that I want to hithome on again is with an HSA
account, usually you're going tobe required to keep some
minimum amount in cash in thataccount.
So if I'm funding my accountwith 5,000 per year my HSA
(07:55):
provider of which there was manyof them they might require me
to keep $1,000 simply in cash.
All new contributions will goto cash, but they will give me
the option of investing anythingabove $1,000.
So the first thousand I put inthat has to stay in cash.
The next thousand, the next2,000, the next 10,000, 20,000,
et cetera, I can start investingthat money and I can start
(08:15):
growing that money.
And to keep in mind, that istax-free.
All that growth is tax-free,and then if I pull it out for
qualified medical expense, alsotax-free.
So let's now look at a bit morein-depth of a case study here to
really illustrate some of thetax savings power that these
accounts have.
Let's look at John.
John is 40 years old and he'sgoing to work until the age of
60.
Every year John puts in $5,000to his health savings account,
(08:39):
which means John gets a $5,000tax deduction for doing so.
Now, of course, we have toassume that John's married in
this case, because his limitwould be $4,300 if he was single
.
So we're just making someassumptions here using some
round numbers $5,000 the next 20years.
So if John happened to have$5,000 every single year in
medical expenses, what he's doneis every year he has been able
(09:02):
to write off that $5,000.
Why has he done this?
Well, the $5,000 contributionto his HSA that was a tax
deduction.
So right off is the wrong wayof saying it, it is a deduction
against his income.
And then he uses that tax-freemoney to pay for his medical
expenses.
So over 20 years John haseffectively deducted $100,000 of
(09:22):
medical expenses that wouldhave been taxable to him had he
not put money into his HSA.
So that's a great startingpoint.
$100,000 saved over 20 yearsthat's significant.
That's what most people aredoing with their HSA.
Now let's take a look at anotherstrategy John could have
employed to really leverage thetax benefits.
So that first option is greatLots of money saved.
But can he do even better?
(09:43):
Well, let's assume that Johnhas the exact same scenario
$5,000 of contributions from age40 to age 60, and he incurs
$5,000 of medical bills.
This could be him, his family,anything.
So $5,000 of medical expenses.
In this scenario, let's assumethat now John pays for those
$5,000 of medical expenses outof his cash flow.
He's building up his HSA.
(10:04):
So every year that's growingwhile he is paying for cash for
his medical expenses as he goes.
If those $5,000 ofcontributions that he is making
to his HSA, if he is investingthat and let's assume that he
grows at 8% per year just use asimple number here, not a
guarantee, just for illustrativepurposes only $5,000 growing at
8%, doing that for 20 years,john would have just under
(10:25):
$290,000 in his HSA account atthe end of this 20-year time
period.
So now what can John do?
Well, at age 60, john hascaught $290,000 in this account.
Of that account, $100,000 canbe taken tax-free at any time.
That $100,000 is because John'sbeen saving his receipts as
(10:46):
he's incurred these qualifiedmedical expenses.
That's $100,000 of tax-freemoney very much like a Roth IRA
at this point that John hasavailable to him.
In addition to that, theremaining $190,000, that can
still be taken tax-free for newqualified medical expenses.
So what counts as a qualifiedmedical expense?
Well, obviously, things likegoing to the doctor, things like
(11:07):
paying for that expense.
But what about COBRA premiums,certain long-term care insurance
premiums, medicare premiums notMedigap, but Medicare premiums
all these things, things thatyou will have in your retirement
?
How great would it be if youhad a tax-free way of paying for
those things.
That's exactly what couldhappen in this case.
For John is of his $290,000,which, keep in mind, that can
(11:28):
keep growing.
It doesn't have to stop growingsimply because he retired he
essentially has $190,000 tocover these things Medicare
premiums, cobra premiums betweenage 60 to 65 or other insurance
premiums, actual healthcarecosts.
He has a good chunk of money todo that.
Not to mention, he has $100,000that he can do whatever he
wants with If he wants to drawthat money at any time.
(11:49):
That money is tax-free because,as I mentioned before, he's
already had the medical expensesthat he could attach those to,
even though he didn't pull themoney out in the same exact year
.
So that's an incrediblestrategy that can yield lots of
tax-free income to you in yourretirement.
Now a couple more things here towrap this up and make sure that
you're truly using your HSA toits fullest extent possible At
the age of.
If you are not using thesefunds for healthcare expenses,
(12:13):
you can now start drawing thesefunds for anything If you want
to take a trip, if you want todo something, if you want to buy
groceries, whatever it is butyou lose the tax-free withdrawal
nature.
Keep in mind you still got atax-free contribution and you
still got tax-free growth.
It almost becomes like anotherIRA for you or 401k Pre-tax on
the way in tax deferral growthalong the way, and then when you
(12:34):
pull it out, it's taxable.
So not ideal if you could usethis for qualified medical
expenses.
But if you're in a situationwhere you're saying I've built
this thing up to such a largeamount that I actually have more
than enough to cover all mymedical expenses, you could then
turn around once you'veattained the age of 65 or older
and actually use that like you,would another IRA Pull the money
out?
You're not paying any penaltieslike you would have prior to 65
(12:57):
, but you're going to pay taxeson those withdrawals if they're
not for qualified medicalexpenses.
Another thing a lot of timespeople with a traditional IRA or
401k or investment account,they don't mind building that
account for a long time, usingwhat they want from it, knowing
that their beneficiaries areultimately going to inherit that
.
That's not the case with theHSA.
This is an account that you dowant to make sure, ideally, you
(13:21):
are fully utilizing by the timethat you and or potentially, a
spouse, pass away.
Here's how those rules work.
If I were to pass away, myspouse would inherit my HSA.
It would simply become hersvery much like an IRA.
If I pass away, my spouseinherits my IRA become hers very
much like an IRA.
If I pass away, my spouseinherits my IRA.
If myself and my spouse passaway, or if I wasn't married and
my children inherited my HSA,the HSA balance is fully taxable
(13:44):
to them in the year that theyinherited.
So it's not a great account todo some legacy planning, some
beneficiary planning.
It's a great account to protectyou and if you're married to
spouse but don't keep buildingthis account up forever, getting
addicted to the tax benefits,saying this is $300,000,
$400,000, $500,000.
At some point that's actuallygoing to be a counterproductive
(14:04):
strategy, because if you're notusing it, your children or your
heirs if it's a non-spouse heirthey won't get the same tax
benefits you will.
It will all become taxable tothem when they inherit it won't
get the same tax benefits youwill.
It will all become taxable tothem when they inherit it.
Another thing to quicklymention that goes along with
that is once you are enrolled inMedicare, you can no longer
make new HSA contributions.
You can still, of course,maintain your existing HSA
(14:24):
balance.
It can keep growing, you canstill take out distributions
from that, but you cannot makenew contributions to that
account.
So where do HSAs fall into thebig picture?
Grand scheme of things, as Imentioned before, if you don't
have a high deductible healthcare plan, they don't pertain to
you at all.
This isn't something you havethe ability to contribute to.
If you do, I like to think ofan order of operations, of where
(14:47):
should you start when it comesto investing your funds.
First, if you have a 401k witha match.
Take full advantage of that.
That's free money.
That's an automatic return oninvestment that you're getting.
Make sure that you're doingthat first.
After that, though, the HSAsare probably the second thing
I'd want to look at.
In general, there's, of course,nuances and it depends upon
your situation, but if I'mlooking through a checklist of
(15:09):
what am I looking through first,after your 401k match, these
can potentially become the nextmost impactful things that you
can invest in, assuming you'reeligible.
So understand the HSA, maybethe least appreciated and most
effective type of tax planningtool you have.
When you factor in tax-freecontributions, tax-free growth
and then tax-free qualifiedwithdrawals, the combination of
(15:31):
those three things, along withsome of the other things we
talked about today, can beincredibly powerful when it
comes to planning for a verytax-efficient retirement.
Root Financial has not providedany compensation for and has not
influenced the content of, anytestimonials and endorsements
shown.
Any testimonials andendorsements shown have been
invited, have been shared witheach individual's permission and
(15:52):
are not necessarilyrepresentative of the experience
of other clients.
To our knowledge, no otherconflicts of interest exist
regarding these testimonials andendorsements.
Hey, everyone, it's me againfor the disclaimer.
Please be smart about this.
Before doing anything, pleasebe sure to consult with your tax
planner or financial planner.
Nothing in this podcast shouldbe construed as investment, tax,
legal or other financial advice.
It is for informationalpurposes only.
(16:14):
Thank you for listening toanother episode of the Ready for
Retirement podcast.
If you want to see how RootFinancial can help you implement
the techniques I discussed inthis podcast, then go to
rootfinancialpartnerscom andclick start here, where you can
schedule a call with one of ouradvisors.
We work with clients all overthe country and we love the
opportunity to speak with youabout your goals and how we
(16:35):
might be able to help.
And please remember, nothing wediscuss in this podcast is
intended to serve as advice.
You should always consult afinancial, legal or tax
professional who's familiar withyour unique circumstances
before making any financialdecisions.
I believe health savings accounts are one of the
most effective places you caninvest your money, but only if
you know the rules around how toproperly use them.
So in today's episode we'regoing to talk about health
savings accounts, how they workand some strategies some
little-known strategies that youcan use to maximize the tax
impact of everything youcontribute to your HSA plan.
This is another episode ofReady for Retirement.
(00:22):
I'm your host, james Canole,and I'm here to teach you how to
get the most out of life withyour money.
And now on to the episode.
Let's start by getting a quickrundown of how health savings
accounts, or HSAs, work.
With an HSA, any contributionsyou make are tax-free at the
federal level and they aretax-free at the state level at
all, but two states soCalifornia and New Jersey do not
(00:44):
recognize HSA contributions,but the other 48 out of 50
states do, and thosecontributions are tax-free.
Now these contributions alsocontinue to grow tax-free.
So with an HSA and we'll get tothis in a little bit you have
to keep some of your money incash, but you can invest the
difference.
You can invest the remainderand that money grows tax-free.
And then, if you're pullingthat money out for qualified
(01:06):
medical expenses we'll also getto that a bit later that money
comes out tax-free.
So what you essentially have isyou have a triple tax benefit
here of tax-free contributions,tax-free growth and tax-free
withdrawals.
And what I'm going to show youis how do you take most
advantage of this, in somelittle known ways, to maximize
the effectiveness of what thisaccount can do for you the of
this in some little known ways,to maximize the effectiveness of
(01:27):
what this account can do foryou.
The first detail to know at thisis are you even eligible for an
HSA?
To be HSA eligible, you have tobe enrolled in a high
deductible health plan.
Now, just because you believethat your healthcare plan has a
high deductible does notnecessarily mean that it is a
high deductible plan.
These plans will have minimumsfor the actual deductible
involved with it and they willhave maximums for out-of-pocket
costs, and the plan itself willsay whether or not it is high
(01:49):
deductible and whether it is HSAeligible.
But that's the first thing.
If you don't have a highdeductible health plan, you
cannot use an HSA or you cannotcontribute new dollars to an HSA
.
An HSA doesn't mean that it'san HMO or a PPO.
You can have an HSA with both.
The main thing that you need tolook at here is is this a high
deductible healthcare plan andis it HSA eligible?
(02:10):
The second detail that you needto be aware of is the
contribution limits, and paycareful attention to this,
because this is slightlydifferent than how something
like a 401k works.
If you have an HSA for anindividual only, the most that
you can put into that plan for ayear is $4,300.
If it's a family plan, the mostthat you can put in is $8,550.
But here's what's differentabout how these contributions
(02:31):
work when compared to somethinglike a 401k.
When you have a 401k and wetalk about contribution limits,
that is the amount that youpersonally can put in to your
401k.
Any employer contributionsdon't count against that limit
that you have for yourself.
With HSAs, however, this is atotal contribution limit.
So if you're single and youhave an HSA for yourself only,
(02:52):
and let's say that your employerputs in $500 to your HSA, that
$500 counts towards the $4,300limit, which means that you can
only put in $3,800.
So keep that in mind.
These contribution limits arethe combined amount that you and
your put in $3,800.
So keep that in mind.
These contribution limits arethe combined amount that you and
your employer puts in.
Another thing that's slightlydifferent than what you might be
used to with 401ks is with401ks, as soon as you are 50 or
(03:13):
older, you get to make acatch-up contribution.
The same concept applies withHSAs, but the catch-up
contribution is an extra $1,000and it's from 55 and older, not
50 and older like 401ks are.
So once you're 55 or older, youcan start making these catch-up
contributions to your HSA toget even more money into the
plan.
The next thing to note withHSAs is there's a lot of
(03:34):
confusion Now.
Sometimes people will ask isn'tan HSA one of those use it or
lose it accounts?
And the answer is no.
The use it or lose it accountthat people are typically
referring to is an FSA, aflexible spending account.
That is an account that youcontribute to it and you need to
use those dollars by the end ofthe year.
Otherwise those dollars go awayWith a health savings account,
and keep this in mind becausethis is going to tie into the
(03:56):
strategies we talk about here inone second.
With an HSA, any contributionsthat you make, those carry
forward with you.
You begin growing this accountbalance that you do not lose if
you don't use thosecontributions by the end of the
year.
Just a few more details, a fewmore things we want to lay the
groundwork on before we start totalk about the strategy around
HSAs.
But one other important thingto note is, unlike IRAs or Roth
(04:18):
IRAs, there's not an incomelimit.
It does not matter how much youearn.
You can make HSA contributionsat any income level, provided
you are enrolled in a highdeductible health plan.
So let's now get into some ofthe strategy here, some of the
things that you can do with yourHSA to significantly leverage
the tax impact that you havehere and possibly make this one
of the core assets that you haveto prepare for your retirement.
(04:39):
Now, before we do real quick,make sure that you subscribe to
this show.
If you're listening on YouTube,subscribe.
If you're listening on ApplePodcasts, on Spotify, wherever
you are, make sure that yousubscribe so you don't miss
future episodes.
So what can you now do withthese HSAs?
One really important thing tonote here that very few people
actually understand is you donot have to use your HSA funds
in the same year that you incura qualified medical expense.
(05:00):
So, as I mentioned at thebeginning, contributions to the
HSA are tax-free.
Growth is tax-free, with theexception of New Jersey and
California and withdrawals aretax-free, assuming you're using
those withdrawals or you'reusing that money that you pull
out for qualified medicalexpenses.
The beautiful thing is, youdon't have to align the year in
which the qualified medicalexpense is incurred in the year
(05:21):
in which you pull funds out ofyour HSA.
So, for example, let's assumethat I personally put $5,000
into my family's HSA this yearand let's also assume that this
year I incur a medical expensethat cost me $3,000.
What I could choose to do is Icould choose to pull 3,000 from
my HSA to pay for that medicalexpense, or I could simply use
my cash.
I could use money from my bankaccount to pay for that $3,000
(05:43):
medical expense and leave thefull $5,000 in the HSA.
Here's what that does.
Now my HSA can continue growingand let's assume that five
years from now, 10 years fromnow, I need some extra cash and
I'm trying to figure out whereshould I pull this from.
Well, in that year, even ifit's five or 10 or however many
years from today, I can stillpull that $3,000 out because I
(06:04):
incurred an expense, and that$3,000 that I pull out still
counts as a qualified medicalexpense.
Even if 2025 is the year that Iincur the actual medical
expense, I can pull the fundsout in 2030, 2035, 2040.
It doesn't have to correspondto the actual year that I
maintained or incurred theexpense.
Now pro tip.
This is why it's very importantto keep track of your medical
(06:26):
expenses.
If you're incurring medicalexpenses and you have a health
savings account but you're usingcash flow to pay for those
expenses meaning you're usingother assets outside of your HSA
keep track of that, becausehere's where the beauty comes
into play.
Let's assume that every yearfor the next 10 years, I incur
$3,000 in medical expenses andlet's also assume that every
year for the next 10 years, I'mcontributing $5,000 to my
(06:48):
family's HSA account.
So that's 10 years ofcontributions.
That's 5,000 per year.
So $50,000 of contributions.
But let's assume that thatmoney's grown because I've
invested it and it's now worth$75,000.
That's $75,000.
And of that $75,000, Iessentially have $30,000.
10 years of $3,000 per year ofexpenses.
I have $30,000 that I can pullout tax-free at any time.
(07:11):
It doesn't have to be at thatpoint for an actual medical
expense.
If I want to take my family ona really nice trip.
I have $30,000 of tax-freefunds there.
If I run into hard times and Ineed to pull money from
somewhere, I have $30,000 oftax-free funds there.
So this is one of the beautifulthings about health savings
accounts is you can use it tostart building this beautiful
portfolio, knowing that part ofthat portfolio can always be
(07:33):
tapped into completely tax-freein the event that you need it,
even if you don't have a medicalexpense in that year, assuming
you have incurred medicalexpenses up until that time.
Now I mentioned this brieflyearlier.
But one point that I want to hithome on again is with an HSA
account, usually you're going tobe required to keep some
minimum amount in cash in thataccount.
So if I'm funding my accountwith 5,000 per year my HSA
(07:55):
provider of which there was manyof them they might require me
to keep $1,000 simply in cash.
All new contributions will goto cash, but they will give me
the option of investing anythingabove $1,000.
So the first thousand I put inthat has to stay in cash.
The next thousand, the next2,000, the next 10,000, 20,000,
et cetera, I can start investingthat money and I can start
(08:15):
growing that money.
And to keep in mind, that istax-free.
All that growth is tax-free,and then if I pull it out for
qualified medical expense, alsotax-free.
So let's now look at a bit morein-depth of a case study here to
really illustrate some of thetax savings power that these
accounts have.
Let's look at John.
John is 40 years old and he'sgoing to work until the age of
60.
Every year John puts in $5,000to his health savings account,
(08:39):
which means John gets a $5,000tax deduction for doing so.
Now, of course, we have toassume that John's married in
this case, because his limitwould be $4,300 if he was single
.
So we're just making someassumptions here using some
round numbers $5,000 the next 20years.
So if John happened to have$5,000 every single year in
medical expenses, what he's doneis every year he has been able
(09:02):
to write off that $5,000.
Why has he done this?
Well, the $5,000 contributionto his HSA that was a tax
deduction.
So right off is the wrong wayof saying it, it is a deduction
against his income.
And then he uses that tax-freemoney to pay for his medical
expenses.
So over 20 years John haseffectively deducted $100,000 of
(09:22):
medical expenses that wouldhave been taxable to him had he
not put money into his HSA.
So that's a great startingpoint.
$100,000 saved over 20 yearsthat's significant.
That's what most people aredoing with their HSA.
Now let's take a look at anotherstrategy John could have
employed to really leverage thetax benefits.
So that first option is greatLots of money saved.
But can he do even better?
(09:43):
Well, let's assume that Johnhas the exact same scenario
$5,000 of contributions from age40 to age 60, and he incurs
$5,000 of medical bills.
This could be him, his family,anything.
So $5,000 of medical expenses.
In this scenario, let's assumethat now John pays for those
$5,000 of medical expenses outof his cash flow.
He's building up his HSA.
(10:04):
So every year that's growingwhile he is paying for cash for
his medical expenses as he goes.
If those $5,000 ofcontributions that he is making
to his HSA, if he is investingthat and let's assume that he
grows at 8% per year just use asimple number here, not a
guarantee, just for illustrativepurposes only $5,000 growing at
8%, doing that for 20 years,john would have just under
(10:25):
$290,000 in his HSA account atthe end of this 20-year time
period.
So now what can John do?
Well, at age 60, john hascaught $290,000 in this account.
Of that account, $100,000 canbe taken tax-free at any time.
That $100,000 is because John'sbeen saving his receipts as
(10:46):
he's incurred these qualifiedmedical expenses.
That's $100,000 of tax-freemoney very much like a Roth IRA
at this point that John hasavailable to him.
In addition to that, theremaining $190,000, that can
still be taken tax-free for newqualified medical expenses.
So what counts as a qualifiedmedical expense?
Well, obviously, things likegoing to the doctor, things like
(11:07):
paying for that expense.
But what about COBRA premiums,certain long-term care insurance
premiums, medicare premiums notMedigap, but Medicare premiums
all these things, things thatyou will have in your retirement
?
How great would it be if youhad a tax-free way of paying for
those things.
That's exactly what couldhappen in this case.
For John is of his $290,000,which, keep in mind, that can
(11:28):
keep growing.
It doesn't have to stop growingsimply because he retired he
essentially has $190,000 tocover these things Medicare
premiums, cobra premiums betweenage 60 to 65 or other insurance
premiums, actual healthcarecosts.
He has a good chunk of money todo that.
Not to mention, he has $100,000that he can do whatever he
wants with If he wants to drawthat money at any time.
(11:49):
That money is tax-free because,as I mentioned before, he's
already had the medical expensesthat he could attach those to,
even though he didn't pull themoney out in the same exact year
.
So that's an incrediblestrategy that can yield lots of
tax-free income to you in yourretirement.
Now a couple more things here towrap this up and make sure that
you're truly using your HSA toits fullest extent possible At
the age of.
If you are not using thesefunds for healthcare expenses,
(12:13):
you can now start drawing thesefunds for anything If you want
to take a trip, if you want todo something, if you want to buy
groceries, whatever it is butyou lose the tax-free withdrawal
nature.
Keep in mind you still got atax-free contribution and you
still got tax-free growth.
It almost becomes like anotherIRA for you or 401k Pre-tax on
the way in tax deferral growthalong the way, and then when you
(12:34):
pull it out, it's taxable.
So not ideal if you could usethis for qualified medical
expenses.
But if you're in a situationwhere you're saying I've built
this thing up to such a largeamount that I actually have more
than enough to cover all mymedical expenses, you could then
turn around once you'veattained the age of 65 or older
and actually use that like you,would another IRA Pull the money
out?
You're not paying any penaltieslike you would have prior to 65
(12:57):
, but you're going to pay taxeson those withdrawals if they're
not for qualified medicalexpenses.
Another thing a lot of timespeople with a traditional IRA or
401k or investment account,they don't mind building that
account for a long time, usingwhat they want from it, knowing
that their beneficiaries areultimately going to inherit that
.
That's not the case with theHSA.
This is an account that you dowant to make sure, ideally, you
(13:21):
are fully utilizing by the timethat you and or potentially, a
spouse, pass away.
Here's how those rules work.
If I were to pass away, myspouse would inherit my HSA.
It would simply become hersvery much like an IRA.
If I pass away, my spouseinherits my IRA become hers very
much like an IRA.
If I pass away, my spouseinherits my IRA.
If myself and my spouse passaway, or if I wasn't married and
my children inherited my HSA,the HSA balance is fully taxable
(13:44):
to them in the year that theyinherited.
So it's not a great account todo some legacy planning, some
beneficiary planning.
It's a great account to protectyou and if you're married to
spouse but don't keep buildingthis account up forever, getting
addicted to the tax benefits,saying this is $300,000,
$400,000, $500,000.
At some point that's actuallygoing to be a counterproductive
(14:04):
strategy, because if you're notusing it, your children or your
heirs if it's a non-spouse heirthey won't get the same tax
benefits you will.
It will all become taxable tothem when they inherit it won't
get the same tax benefits youwill.
It will all become taxable tothem when they inherit it.
Another thing to quicklymention that goes along with
that is once you are enrolled inMedicare, you can no longer
make new HSA contributions.
You can still, of course,maintain your existing HSA
(14:24):
balance.
It can keep growing, you canstill take out distributions
from that, but you cannot makenew contributions to that
account.
So where do HSAs fall into thebig picture?
Grand scheme of things, as Imentioned before, if you don't
have a high deductible healthcare plan, they don't pertain to
you at all.
This isn't something you havethe ability to contribute to.
If you do, I like to think ofan order of operations, of where
(14:47):
should you start when it comesto investing your funds.
First, if you have a 401k witha match.
Take full advantage of that.
That's free money.
That's an automatic return oninvestment that you're getting.
Make sure that you're doingthat first.
After that, though, the HSAsare probably the second thing
I'd want to look at.
In general, there's, of course,nuances and it depends upon
your situation, but if I'mlooking through a checklist of
(15:09):
what am I looking through first,after your 401k match, these
can potentially become the nextmost impactful things that you
can invest in, assuming you'reeligible.
So understand the HSA, maybethe least appreciated and most
effective type of tax planningtool you have.
When you factor in tax-freecontributions, tax-free growth
and then tax-free qualifiedwithdrawals, the combination of
(15:31):
those three things, along withsome of the other things we
talked about today, can beincredibly powerful when it
comes to planning for a verytax-efficient retirement.
Root Financial has not providedany compensation for and has not
influenced the content of, anytestimonials and endorsements
shown.
Any testimonials andendorsements shown have been
invited, have been shared witheach individual's permission and
(15:52):
are not necessarilyrepresentative of the experience
of other clients.
To our knowledge, no otherconflicts of interest exist
regarding these testimonials andendorsements.
Hey, everyone, it's me againfor the disclaimer.
Please be smart about this.
Before doing anything, pleasebe sure to consult with your tax
planner or financial planner.
Nothing in this podcast shouldbe construed as investment, tax,
legal or other financial advice.
It is for informationalpurposes only.
(16:14):
Thank you for listening toanother episode of the Ready for
Retirement podcast.
If you want to see how RootFinancial can help you implement
the techniques I discussed inthis podcast, then go to
rootfinancialpartnerscom andclick start here, where you can
schedule a call with one of ouradvisors.
We work with clients all overthe country and we love the
opportunity to speak with youabout your goals and how we
(16:35):
might be able to help.
And please remember, nothing wediscuss in this podcast is
intended to serve as advice.
You should always consult afinancial, legal or tax
professional who's familiar withyour unique circumstances
before making any financialdecisions.
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