Ep. 218 – Using a Health Savings Account (HSA) for Medical and Retirement Planning

In this Episode of the Secure Your Retirement Podcast, Radon and Murs discuss ten advantages to a Health Savings Account (HSA) and why you need to know them. A Health Savings Account is a valuable medical and long-term retirement planning tool with more than just tax benefits.

Listen in to learn how to let your HSA contributions grow and invest the money over time for future use as an asset. You will also learn the different ways you can control when and how you want to spend your money on different qualified medical expenses.

In this episode, find out:

• HAS’s tax advantages – contributions are tax deductible and can be done at your tax filing.
• Triple tax savings – understanding three tax benefits you get from HSA.
• Lower healthcare cost – the advantage of a high deductible plan with an HSA.
• Affordable and long-term savings – how your HSA contributions can accumulate and grow for future use.
• Investment opportunities – how some HSA accounts allow investment in the money markets.
• A retirement savings plan with the ability to grow a bucket for future medical expenses.
• Flexibility and control – ways you can control when and how you want to spend your money on different qualified medical expenses.
• Pretax contributions to payroll deductions – this makes savings easier and smooth.
• There’s no use it or lose it rule – HSA is similar to IRA, where you don’t lose money if you don’t use it.
• Retirement savings vehicle – let your HSA bucket grow and invest over time to use it as an asset.
• Control over your healthcare decisions – you get to make choices on what and how you spend on medical expenses.

Tweetable Quotes:

• “If you’re someone who doesn’t go to the doctor often or is relatively healthy, a high deductible plan with an HSA could make a lot of sense because you lower your premiums and cost of actual medical insurance.” – Murs Tariq
• “There’s a wide range of what you can use your HSA money for when it comes to medical expenses.”– Radon Stancil  

Resources:

If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

To access the course, simply visit POMWealth.net/podcast.

Here’s the full transcript:

Radon Stancil:	Today, we’re going to talk about health savings accounts. Some of you might know it as HSAs. There may be some things about an HSA that we don’t understand or maybe how we can apply it to retirement planning, because that’s really what we’re focused on, is how do we use it in retirement. And so, we thought it would be good today to walk through. Really, kind of, we’re breaking it into 10 things that you need to know about an HSA, why you need to know it, what are some of the benefits, how do you convert it over into a retirement vehicle, when can you do that. All those kind of questions we’re going to talk through today because if you have the ability or you had the ability to contribute to an HSA, it can be a very useful tool.
	So, we’re going to just work through these 10 items and we’re going to [inaudible] go back and forth. So, we’re going to jump right in to the first point, which are tax advantages.
Murs Tariq:	Yeah. So, the tax advantages on the HSA are pretty good. Basically, the way an HSA works is that you contribute to it, either through your employer plan that they may have set up through, for you through their medical association. Or, you can do an HSA individually as well. But, basically as you contribute to it, you get a tax deduction and so what that tax deduction does is it lowers your income for the year, so it can help out your overall tax situation.
	Contributions to an HSA… It’s not unlimited, so you do have to be aware what the amounts are. For 2023, if you are covering a solo plan, so really just a medical plan for yourself that is HSA eligible… That is an important piece too, that it has to be… Your plan has to be eligible for an HSA. Not all plans are eligible for them, so you want to be aware. Today, I think all the health care providers are pretty clear about this plan is, this plan is not. It really comes down to the deductibles and out of pocket maxes and things like that. But, they’re very clear on this type of plan can have one, this type of plan cannot. So, just be sure to check on that.
	But, if you are eligible for an HSA, you can contribute. As a solo plan, you can contribute up to 3850, 3,850 a year. This is for 2023. And, that also… If you do that, it’s going to take 3850 off of your income for the year, so that’s kind of nice. If you’re covering a family, then that number goes up to 7,750 a year can go into this plan. So, again, 7750 can come off of your tax return for the year, which is a nice tax benefit. And, then on top of that, if you’re above the age of 55 and up, there’s a catch-up contribution that is allowable, which is an additional thousand dollars that you can contribute to the HSA plan.
	So, it has a… That is just one piece of the tax advantages, that you can get a tax deduction. We’re going to talk about the other tax advantages as well and the main reason as to why anyone would use an HSA. We’ll get into that as well. But, contributions are tax deductible and also they can be done at your tax filing. So, sometimes deadlines are at the end of the year. With the HSA, the contribution deadline is really at your tax filing time. So, for most of you, that’s going to be in April of the following year.
Radon Stancil:	All right. So, now, point number two is that you have triple tax savings and we’ll say it again. Triple tax savings. So, what does that mean? Well, first of all, when you put the money in, just like Murs said, when I put my money in, it is… The contributions are tax deductible. So, if I put in 3800 or $7,000, I deduct that from my income. I don’t have to pay income taxes on that. So, that’s one of the tax savings.
	The second one is, is that the money grows in the account tax-deferred or even possibly tax-free. So, really we’re not paying taxes on the growth. Okay? So, if I put 7000 in and it stays in there and it grows to 14,000, I didn’t pay taxes on that $7,000 of growth. So, that’s the second one. I get tax-free growth and [inaudible] don’t have to pay taxes on that growth.
	And, here’s the third category. I can pay now for medical expenses and I don’t have to pay taxes on that money. So, just… Let’s just make it simple. I have money over in my health savings account. I need to go pay a co-pay or I need to go pay something in the drugstore or pharmacy or I’ve got to buy something for a medical reason. I don’t pay any taxes on that. So, I basically was able to get a tax deduction on what I did. I’m able to pull the money out now, pay for those expenses, and I never had to pay taxes on any of that. So, it’s just a really great benefit if I’m using this for medical things and so I… And, I can just let that money sit there and accumulate, which we’re going to talk a little bit more about as we move forward.
	So, we’ll hit now our third topic.
Murs Tariq:	All right. Number three is it can lower our health care costs. Well, what does that mean? Well, an HSA plan is typically reserved for those what would be considered more of the high deductible type of health insurance plans and the high deductible plans typically are going to be a little less costly when it comes to the premiums that you’re paying out of your paycheck or if you’re funding it privately. Those monthly bills are going to be a little bit lower because there aren’t as many benefits built into the actual plan itself, which is why they allow for the HSA and the HSA comes with the advantages of lowering your overall taxes for the year and everything like that.
	So, if you are someone who doesn’t go to the doctor all that often or is relatively healthy, an HSA could make a lot… Or, a high deductible plan with an HSA could make a lot of sense because you lower your premiums, the cost of actual medical insurance. You’re lowering that. And, maybe you go to the doctor once or twice a year just for your regular check-ups, so you’re not paying elevated premiums for an insurance that you’re not really utilizing. They’re not for everyone, so you want to evaluate what type of health insurance you truly need and does an HSA even fit into the plan. But, if you’re using them, typically you’re going to… If you’re going to use an HSA-eligible plan, typically your cost of insurance is going to go down a little bit and so that’s where it can help out from a cash flow perspective for a lot of people.
Radon Stancil:	All right. Our next one, number four, is portable and long-term savings. So, here’s the thing. The HSA is an account, health savings account, but if you got it set up through your employer and you leave that employer, you can move it to wherever you’re going. It’s not necessarily connected. You as the individual own the HSA. So, let’s say I put 7000 in it. I don’t use my 7000 and the next year I put 7000. I don’t use my 7000. The next year, I put 7000. I don’t use my 7000. Now, I got $21,000 in the account plus growth and I am now going to move insurance companies, move employers, whatever it might be. That is my account. It is not in all essence legally connected to the insurance company nor to your employer.
	So, I can continue. If I am doing an HSA, I can contribute those dollars every single year or let it grow and it’s really a long term savings. So, if I start when I’m 30, 40, 50, whatever, I can just continue to contribute, continue to have that money sit in there, and if I don’t need it, then it just continues to grow. So, it just gives us a great avenue for tax deductibility because remember, all those contributions are going in there. You do not have to use the funds, by the way. I have an HSA that I put money in every single year and I have not chosen to use any of that money yet for health care. I just let it… As long as I can take care… But, if I needed it, I can use it for that. But, I still… I’m putting it in there, getting the deductibility on those contributions and letting it accumulate and then maybe one day I can either need it if I… Use it if I need it or I can use it in the future when I get older.
Murs Tariq:	Yep. So, that’s going to lead into number five, which is you have investment opportunities with HSAs. Not all HSAs allow for investing within them. So, for example, I have one at the bank, at the credit union that I bank at, and it’s really just a kind of like a savings account. It’s going to earn an interest rate about maybe about two percent or something like that. But, it has no investment features to it.
	On the flip side, my wife has one through her company, her benefits through her company, and hers allows for the ability to go and invest the assets in the HSA. So, there’s a [inaudible] dollars accumulate in the plan and eventually you can say, “Well, I’m going to start investing it into an index, different types of index funds, stocks, bonds, mutual funds.” Whatever you have, with the idea of, hey, if we can get money into this account, right, putting the money in there, we get a tax break immediately and then also if we can grow it over time and then potentially have tax-free distributions in the future, well, then why not try to grow it?
	And so, that is… I think it’s going to tie into one of the other topics that we have, which is a lot of people view an HSA as another element of their retirement savings plan. But, the ability to grow a bucket of money for future tax-free use for medical expenses I think is huge and that’s a huge advantage of the HSA.
Radon Stancil:	All right. Point number six. Flexibility and control. So, the HSA is yours. It’s not a requirement that you have to use it for certain types of medical expenses. I can choose not to spend it, as I said earlier. But, you can control when and how you want to spend the money on different qualified medical expenses. So, what could that be? This list that I’m about to say is not exhaustive. It’s just some ideas.
	Deductibles. So, you go to the hospital. You’ve got a thousand dollar deductible. You can pay that thousand dollars or a $5,000 deductible. I can take money out to pay that deductible and remember, I don’t pay any taxes on that. I can use it for that.
	Co-pays. I go to the doctor and I got a $50 co-pay and I could just… And, by the way, with an HSA, most HSAs anyway, my HSA, I get a debit card and that debit card looks just like a Visa debit card. So, if I go to the doctor and I have to pay a co-pay, I can just give them that card and pay for that.
	Prescriptions. I go to get my prescription. All of it’s not covered. I can now pay for that prescription with that. And, then also some over-the-counter items, I can also buy. There’s a… There are nice lists out there to tell you, but really anything related to helping me stay healthy, I can use it on that area.
	Another thing to think about is let’s say that I’ve accumulated this money and now I were to go into a long term care situation and a lot of long term care policies and different things, you have what’s called an elimination period where now I’m having to pay for my expenses in the facility that I’m at. Again, that’s in all essence a co-pay. So, I’m able to use that money for that.
	So, there’s a wide range of what I can use it for when it comes to medical expenses.
Murs Tariq:	All right. Number seven. Pre-tax contributions through payroll deductions. So, what this is… I imagine many of you, if you’re retired, while you were working you were working for a company and you were contributing to a 401(k). The nice part about saving into a 401(k), 403(b), different types of employer-sponsored plans, is that once you make the decision of, hey, I want to contribute, it kind of happens automatically. Right? You get paid and then money comes directly out of the paycheck. You get the tax advantage and it goes directly into the 401(k). A lot of employers today are setting up their HSAs the same way so that you can almost set it and forget it to a degree, which is a huge thing when it comes to saving. And so, you can do payroll deductions directly out of your paycheck into the HSA as well. You get the tax deduction and the money goes into the HSA account.
	And so, it’s one of those things I think that helps a lot for families when it comes to just setting up budgets and once… If you have all the automations of dollars going out of your paycheck before it gets into your bank account, it makes things a lot simpler when it comes to saving. It makes things a lot smoother because you don’t really see the money. It just… It gets taken out before it gets into your bank account. So, I think that’s a nice little added advantage with payroll deductions.
Radon Stancil:	All right. Point number eight. There is no use it or lose it rule. And, where you might think about this is what are called flexible spending accounts, FSAs, and some of the employers offer these flexible spending accounts where you could put money into it and then use it for medical expenses. The thing about that is many of those had a provision that if I did not use the money that year, I lost it. It went away. [inaudible] I had to restart each year.
	An HSA, health savings account, does not work that way. I’ve talked about it a little bit earlier. I can contribute and I don’t have to spend it. I can just accumulate money in that account. So, you could think about it as almost, and Murs is about to talk about this, is almost as another IRA in a way if you want to do it that way. So, I’m just going to let Murs segue right into that.
Murs Tariq:	Yeah. Number nine is retirement savings vehicle. I think this is a huge opportunity, a huge strategy that can be used for retirement planning and so I’ll tell you how we do it in my family. We contribute to the HSA up to the max for the family, so this year for 2023, that’s 7750, 7,750 that’s going to go into the HSA. And, with my wife’s employer, they actually provide an amount that they do kind of like an employer matches an amount that goes in that they fund as part of their benefits package. So, money is going into the account and our goal, and it doesn’t have to be a fixed goal, but our goal is, is that we don’t touch the HSA for as long as possible.
	Now, there may be emergencies that come up down the road. There may be things that we just can’t avoid tapping into it. But, the idea here is [inaudible] if we can contribute to the HSA for the next 20 or 30 years, just like you do with a 401(k) or an IRA, if we can contribute to that bucket of money for a period of time and have the ability to invest it over time, then that could turn into a sizable account that can be used for a lot of different reasons.
	And so, right now for medical expenses, we’re happy to pay out of pocket because the goal is to let this HSA bucket grow over time. Now, at some point as we get to where we are approaching retirement, into retirement, we’re going to start using this account. It’s ideally going to work best. Go back to the triple tax advantage. Right? So, you get the deduction when you put the money in and then you let the account grow and then if you use it properly, you can have tax-free withdrawals for medical expenses. So, that’s where this account is going to be reserved or that maybe it started at 7,000 but by the time 20, 30 years down the road, it’s grown into a couple hundred thousand dollars that can be used for tax-free withdrawals in for medical expenses that are covered.
	Now, let’s say we just… We don’t have as many medical expenses or whatever it is. This is something that we’re planning on for 30 years down the road in my case and a nice rule in the HSA is that once you’re above the age of 65, then you are able to use this account for any purpose you would like. So, it doesn’t have to be just for medical expenses. Now, you can use it for anything, kind of like an IRA. The key difference is, is if you use it for medical, then you get tax-free withdrawals, so that’s a huge tax advantage. But, if you don’t use it for medical, then you are subject to income tax and so still a nice little advantage. It’s kind of like adding another IRA bucket into your overall retirement savings plan and so another vehicle that you can save into, get a tax deduction over time, and then let it grow and use it as an asset in a couple different ways.
	So, I think this is a strategy that I think is getting talked about more and more, that everyone should be utilizing an HSA if it makes sense for their overall plan because it’s got that triple tax benefit to it.
Radon Stancil:	All right. Point number 10. Control over your health care decisions. Really, because I’m actually paying a lot of these bills out of my health savings account, if I choose to do so, I get to make choices. I’m not being told by the insurance company necessarily what I’ve got to spend it on and I’ve got a high deductible plan which means I’m going to have the lower costs. I’m able to now take that. I’m way more in control as to how I spend, what I spend on medical expenses, whether or not I want to get the generic or get the actual brand name. Whatever it might be. It just gives me that control.
	So, I mean, I will probably tell you that Murs and I both are fans of an HSA. We both have them in our families. We both think that they’re a very good way to save and we’ve got future benefits as well. So, if you’ve not got an HSA and maybe you’re thinking you got to look at your health care plan and you see opportunities, well then you might want to talk to your provider or your financial advisor, whoever, to say, “Hey, how do we do this?.” If you’ve got one, then you might want to talk again to your financial advisor and say, “How do we utilize this for either medical expenses or for retirement planning?.”