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How to use your HSA as a Retirement Account

Summary

You could use your Health Savings Account (HSA) to pay for current medical expenses. However, if you can, I recommend that you invest the full HSA amount into the stock market and allow it to grow and compound. 

The HSA is the only account that has triple-tax benefits: you don't pay taxes on contributions, growth, or withdrawals (for qualified medical expenses). 

Did you know:

  • You can save your receipts for current medical expenses and pay yourself back in the future?
    • You don't have to have the money in your HSA currently, as long as the account is open, start saving receipts.
  • After the age of 65, you can withdraw money from your HSA for any reason and pay taxes on the gains?
    • This is like having an additional 401k account!
  • Qualified medical expenses include dental, vision, hearing aids, chiropractic care, eyeglasses, and more!
  • You can contribute up to $3,600 as an individual or $7,200 as a family
    • Plus an additional $1,000 as a catch-up if you're over age 55

Resources:

Photo by Chronis Yan on Unsplash

Transcript

Mike: [00:00:00] Welcome to financial planning for entrepreneurs and tech professionals. I'm your host, Mike Morton chartered financial counselor and financial advisor. And with me today is our great friend Julie, Julie. Welcome back.

Julie: [00:00:14] Thanks so much. Glad to be here.

Mike: [00:00:16] All right, today, Julie, we were talking about. How do you use your health savings account as an investment account and why you should use an HSA as an investment account for the future? Now we've talked about, we talked about health savings accounts and HSA before, right?

 Okay. So I'm not going to go over everything to do with HSA today. I want to focus on why, how you should think about it and why, if you can, you should use it as a long-term investment vehicle. All right. So what is the HSA? It's a health savings accounts. It is a type of account that the IRS has lots of rules around because it's got great tax deferred and tax free growth.

It is the only account. That has triple tax benefits. I love saying this, the only account that has triple tax benefits, when you contribute, you don't pay taxes on that money. When it's growing, it grows tax-free, you can make trades and interest and dividends all tax-free. And when you use it for qualified medical expenses, you take it out.

Tax-free the only account in the U S that has the triple tax benefit. So I'm a massive fan of using health savings account, but I'm even more of a fan of using them as an investment account for the future.  . And why is that? Because of what I just said, you're getting tax savings across the board and growing tax-free .

Forever. And I love that. Lots of us have tax deferred accounts and taxable accounts. We want to get more money into these. Tax-free accounts and this is another one. , And I think, you know, it's funny the health savings account it's named health savings account, and people think of it like, Oh, okay. This is great.

I put in some money, maybe my employer contributes some money and I'll use it for spending on health expenses because it's called a health savings account. I think we should rename this thing because    it's used for health savings accounts, but it's really can be treated as a retirement account.

And that's what I want to get into today.

Julie: [00:02:05] okay. Let's dive right in because I'm I love this topic.

Mike: [00:02:09] Okay. All right. So why do you want, why would you want to do this? Let me give you an example. All right. As a family, you can contribute up to $7,200 in a year to a health savings account. Now let me back up to have a health savings account, you need to have a high deductible health plan to have an HSA.

So you got to go through all that, but if you have access to an HSA, that's what I'm talking about. Then you can contribute to 7,200, the 7,200 might come from some of your employer. They might put in some money. On your behalf and it's like income to you, but then you take it off your taxes. So it's basically tax-free or you can contribute say three or $4,000 to max it out at the 7,200.

And you take that off your taxes.  . So let's say you have a one-time contribution 7,200, and I'm telling you, Hey, you should leave that in there. Don't use it for current health expenses. All right. Why should I do that? If that one-time contribution grows tax-free for 20 years. Okay, that can put an extra 10 to $12,000 in your pocket versus   , just paying the current medical expenses from that.

 That's just one year and you can do this every year. So $7,200, let it grow for a while. Extra 10, $12,000, in your pocket.

Julie: [00:03:15] so  , give me some numbers because here's where I think a lot of people. Get hung up on it because you grow and you end up with this massive amount of money in the HSA, which is great, but you can only use it for healthcare expenses. So a lot of people will say once I'm retired I will collect Medicare or Medicaid.

And that covers, however the HSA will support everything that Medicare, Medicaid doesn't cover. So tell me more about that.

Mike: [00:03:44] Yeah, I'll tell you exactly. So you're thinking, geez this grows to my seven 7,200, contribution plus the extra 10 or 12,000 it's 20,000 bucks. And if I do this for a couple of years, man, I'm going to have a hundred thousand dollars in this account and what am I going to spend it on?

All right. So yeah. Or you think you're going to have medical expenses later in life? Definitely. Okay, so we'll, we can spend it on those, but here's the real kicker. There's two things and this is why I wanted to highlight it. Perfect question one. You can spend it on things that you have already incurred if you save the receipts.

So what you do is your current expenses. You have an HSA. You're contributing to it. You have current medical expenses, you have a family, you got kids getting stuff. Things go wrong, in and out sometimes some years, but then you have regular copays. You got prescriptions you're picking up and stuff.

You save all those receipts, all your doctor's bills, all your prescriptions dental, eye glasses. There's lots of other stuff we'll talk about. You save all those receipts. You can pay yourself back at any time. There is no limitation. On when you can pay yourself back. So start saving those receipts, let the money compound for 20 years.

And then if you think, wow. I don't know if I'm going to spend all this. You can start paying yourself back. Tax-free

Julie: [00:04:57] Even if those expenses were incurred 20 years ago, as long as you have the receipt,

Mike: [00:05:02] that's correct. Now the receipts actually don't even really need the receipts, but if you get audited, you're going to need the receipts. And that's why we say save the receipts, take a picture of them. So have a digital file. Take pictures of all your stuff coming in that you're just paying. Now you could pay it using the HSA, right?

You got a debit card. You could swipe that for the prescriptions. , current expenses,  if  you have the opportunity to use just your savings account or checking account to pay for those just using outside taxable money, keep the HSA money growing, tax-free save receipt. Yup. And then just take pictures of them.

Have a digital file. And then years down the road, you can start pulling out thousands of dollars for all that. Once you've allowed it to compound. Tax-free.

Julie: [00:05:44] so this is advice you've given to us and I can tell you firsthand that it is hugely worth it, because for instance, in one year alone we've already spent what we've contributed to the HSA, just in copay. I mean, You have three kids, and then, somebody runs a marathon and breaks a rib and x-rays and MRIs, and, those expenses add up really fast.

And so now I have a nice, neat file of all of the receipts, because just in case we do get audited, but in the future, all of this money, I can just pay back essentially.

Mike: [00:06:21] Yeah, it's fantastic. That's

Julie: [00:06:24] the best investment strategy ever.

Mike: [00:06:28] that's awesome. Julie, a couple of notes on there too, that I love one. You have to have the HSA established. Before you start saving receipts. So you can't be like, Oh, I'll start saving receipts now and get my HSA next year. It has to be established. But to your point, you don't have to actually have the money in there today to cover the expenses.

So say you have this year, like you said, a broken rib and three kids, and we spent $10,000 this year. But you could only contribute 7,200. That's okay. As long as the HSA was established, you can pay yourself back the 10,000 later on. Yeah, 10 years from now, 20 years from now. So in other words, you don't have to have all the dollars in there as soon as you establish it, you can start saving receipts.

Julie: [00:07:08] that's amazing. This is like my favorite strategy of all time.

Mike: [00:07:14] Okay. That's awesome. Now here's the other thing. So here's the other comment when you say what happens if we're not gonna all this? Okay. The best thing about it, this account is that once you're past the age of 65, You can take the money out for any reason and you will just pay income taxes on it.

Okay. So there's no penalty. So in that way, it is acting exactly like a tax deferred, 401k or traditional IRA account you put in the money. Tax-free. Just like you do your traditional 401k or traditional IRA, you take it off your taxes. So 7,200 took it off our taxes. It grows tax free forever. And then when we take it out, if you don't use it for a medical expense, you pay income taxes, same as your traditional 401k, traditional IRA.

So it's a way of   getting around limits. Remember your IRA. You can only do 6,000, your 401k you're limited and employee contributions of 19,500. If you're able to save more than that. HSA tax deferred retirement account. And that's why I think this thing should be renamed, 

Julie: [00:08:20] As best account investment strategy ever.

Mike: [00:08:23] the best account ever. I agree. Triple tax benefits. All right.

Julie: [00:08:27] Yes. 

Mike: [00:08:28] So that's the, 

Julie: [00:08:28] quick question, because what happens if, for example, you are with the company for four years, you're contributing the max to your HSA. Spectacular it's going to grow. But then you leave the company and you go to a new company that doesn't have an HSA. Do you don't lose all that money? Do you?

Mike: [00:08:44] . Perfect question. HSA is, are individual accounts or family accounts. They have family limits, but they are your accounts. So it's not tied to the employer. Now you do have to have, the details of the high deductible health plan and all that. But if you change employers, if you change healthcare and you're no longer eligible for an HSA,  , what it is you're no longer eligible to make contributions to the HSA.

But you get to keep the one that you have. And again, my recommendation, if you can, is to keep it invested, keep it growing until, some time , down the road.

Julie: [00:09:16] Yep. So you can no longer contribute, but it can

Mike: [00:09:18] That's right? Yep.

Julie: [00:09:20] And . If you change employers the eligibility to contribute to the HSA is based on what the company has for benefits. Is that true?

Mike: [00:09:30] it is based on your health care plan. So even if it's, if you get a health care plan, not from your employer, if you got it  from the state, from affordable care or, private healthcare, it's all based on the healthcare plan that you have for you and your family. That's right.

Julie: [00:09:45] And is it a federal rule or is it state by state? Like how do you determine whether or not your health care plan makes you eligible for an HSA?

Mike: [00:09:55] so we're diving into things we're not going to dive into in this podcast around all these details. So there are definitely a lot of details around eligibility to have an HSA. It's not only the high deductible health plan. There are certain other bits and pieces, and then it has to. Conform to those.

, . So it is plan by plan. You've got to check your own plan. So we might have another podcast that goes over  some of those details, but this one's really around using the HSA. So hopefully you have one and then this is my recommendation on absolute best way of using it.

And then this way, it also to your point, Julie, sometimes you have choices when you're at an employer and saying, I could go with this plan or this plan. If one of them comes with an HSA, you might want to consider that option. Now I always tell folks, families healthcare first, pick the health care fair

that makes sense for your family. That's what it is. It's healthcare. So make get the one that is going to be the best for you. But if you're agnostic between a couple of them,  , you can go see the same doctors or whatever it is. . They have different plans like, Oh, your premiums and deductions are different.

And one of them has HSA. I would definitely recommend going that route

now qualify medical expense. I did want to mention this just briefly because to your question what if this grows so much, what am I going to spend this stuff on? And it's all the usual medical stuff, the copays and the surgeries and the doctor visits and all that. It's also all the prescriptions and that stuff, but it's a lot covers lots of other stuff too.

So you can use it for dental vision. chiropractic eye glasses and hearing aids. So it's wide range of things that it can cover. Again, I'm not going to go into all the details you can look up, maybe we'll have another podcast episode, or you can look these things up, but it's much wider than you would expect.

It's not just what your health covers cause your health care is not covering like the dental and the eyeglasses and stuff like that. But the HSA does.

Julie: [00:11:43] And there's a new cool feature. There's an HSA store specifically that you can log on and there's loads of products that you would use every day that are automatically HSA eligible. And you can just use your funds for that on that website. And it gets shipped right to your door, which is awesome.

And everything in the store is HSA approved.

Mike: [00:12:04] That's awesome. Cause I know the one thing I was going to mention is, what's not HSA eligible and a lot of over-the-counter stuff, aspirins and stuff like that is not going to be eligible. So that's cool. There's a store. And I know that Amazon actually also has some HSA stuff in there too.

It'll tell you, yeah. That you can use your HSA, debit card for this or whatever.

Julie: [00:12:23] Yeah. And it's fascinating because there are certain, like aspirin you said is not covered. However sunscreen is. And if you have kids,

you lose that. You use a ton of sunscreen.

Mike: [00:12:32] Holy smokes. I didn't know that. That's amazing.

Julie: [00:12:36] HSA is my jam now.

Mike: [00:12:38] That's awesome.  To maybe we'll have another episode where you can go through , everything that the family might be using. So all this stuff we hadn't thought about. That's awesome. A couple other couple of other points things that are not eligible over the counter supplies are usually not eligible.

Elective cosmetic surgery, health club fees and dependent care. So I'm sure Julie run into this, but all the dependent care and the babysitting and nursery school and stuff is not a health savings. So just want to make sure to mention that. But otherwise, and then the only other thing, around the investments, we said, look, Investors for this, for the future.

Now on that note many HSAs will allow you to invest. So definitely take a look for that. Some of them make you keep some cash balances, 500 or a thousand, or even a couple of thousand as a cash balance. And then you can invest the rest beyond that. The investments are usually a good mix. Usually they have a lot of variety.

Some of them even allow just. Invest in sort of anything, the like at TD Ameritrade, it's an HSA and then you just go to TD and you can literally invest in kind of anything. So every plan is a little different for what you can invest in. And the only other thing I wanted to mention around investment strategy for an HSA, my recommendation is use it for the far future.

Save it and invest it and have a nice diversified portfolio set for that HSA. Individually, not as a part of your kind of overall retirement, but just for that, because I want that to be nice and well balanced to slowly grow over time nicely, but we're not going to be able to really rebalance it with respect to the rest of your 401k and other stuff.

So just have a nice little diversified portfolio in the HSA and every time make contributions just to rebalance it and let it ride

Julie: [00:14:18] spectacular.

Mike: [00:14:19] Any other things that we didn't. Cover here. I think you did a pretty good job.

Julie: [00:14:22] I think so, too. And if you want to do more podcasts on the HSA I'm in.

All right. Julie's going to do some solo episodes. All about HSA is going to be fantastic. All right. Thanks Julie. Another good one and we'll catch you next time.

All right. See you later. Thanks.


Mike: [00:14:37] Thanks for joining us on financial planning for entrepreneurs. If you like, 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 on linkedin or mortonfinancialadvice.com. I'd love to get your feedback. If you have a comment or question, please email me at financialplanningpod@gmail.com. Until next time thanks for tuning in

 

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