3446: The Health Savings Account Strategy That Not Enough People Are Talking About by Rynda Chappell-Wilk with Financial Finesse

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[00:00:55] The card is issued by the bank or bank N.A. This is Optimal Health Daily. The health savings account strategy that not enough people are talking about. By Renda Chappelle-Wilk with FinancialFinesse.com. And I'm Dr. Neal Malik Hey there and welcome to another Sunday bonus episode where I share an article from one of the other podcasts in our network. Today's post comes from Optimal Finance Daily where articles covering everything from saving to budgeting to investing and more

[00:01:25] are read to you every day. You can find Optimal Finance Daily wherever you're hearing this. So with that, here's Diana with the post and commentary as we optimize your life. The health savings account strategy that not enough people are talking about. By Renda Chappelle-Wilk with FinancialFinesse.com.

[00:01:48] I was talking to a colleague of mine earlier this year about how awesome health savings accounts are. And he threw out a little known use of these delightful accounts that made the bogus alarm go off in my head. Even though he's a well-respected and tenured certified financial planner who's on the CFP board, I didn't actually believe him. I had to see it for myself, but it's true. Maybe you've heard about it, but it doesn't get much press yet.

[00:02:17] Qualified HSA withdrawals do not have to be taken in the year in which the expense was incurred. That's right. There's no statute of limitations as to when you can reimburse yourself for a qualified medical expense, as long as you incurred the expense after your HSA was open and funded, provided you hang on to your receipts through the years. There are some pretty cool implications to this fact.

[00:02:42] If you max out your HSA over a period of many years, you can build up quite a nice balance of tax-free money. For example, let's say you start maxing out at age 30 and continue to do so for the next 35 years. At today's contribution rate, a single person could sock away $119,000, including catch-up contributions, assuming the money is not invested and therefore doesn't grow at all.

[00:03:11] If the money were invested in mutual funds and grew at even a conservative rate of 4%, you would have an account worth over $250,000. Furthermore, let's say that over those 35 years, you were able to pay your medical expenses from non-HSA accounts, and you kept track of all of those expenses. This part would vary greatly according to how healthy you are, but let's just say you end up with an average of $1,500 per year,

[00:03:40] growing at a rate of 4% per year in medical expenses on your list. This would mean that you would have about $110,000 eligible for reimbursement, money that you could withdraw from your HSA tax-free. Then, when you decide to retire, you have this nice sum of money that can be used strategically in different ways. Consider a few scenarios. Maybe the market tanks one year, and you don't want to take too much out of your retirement account

[00:04:10] to avoid having to sell in a down market. Assuming it was invested more conservatively, you could tap into your HSA to cover some expenses without taking as much of a hit to your retirement accounts and incur no tax or penalty. Perhaps you're on the verge of tipping over into a tax bracket that would require you to pay higher capital gains tax. You could tap into the HSA to prevent that from happening as well. If you qualify for a subsidy for your health insurance

[00:04:39] through the Affordable Care Act, you should be aware that your subsidy is only good up to certain income limits. In order to keep the subsidy, you must not cross the limit. So let's say you have retired a little early and are funding your early retirement with IRA withdrawals while getting health care through the exchange, and you qualify for a subsidy based on your income. If you're in danger of taking out even $100 over your earnings limit from your IRA to cover expenses,

[00:05:09] this would be a great time to be able to tap into an HSA account and keep your ACA subsidy. If you're collecting Social Security, your adjusted gross income, or AGI, is part of the calculation for determining how much of your Social Security income is taxable. If you can fund part of your lifestyle with HSA money, which won't increase your AGI, you may be able to pay less tax on your Social Security income.

[00:05:36] Or even after you use up your tax-free withdrawals based on medical expenses from prior years, your account will still provide you major benefits. Maybe you choose not to buy a long-term care policy. You can hold on to the HSA to give you some peace of mind that you have something to fall back on if you need special care or incur a lot of medical expenses. If you have long-term care, you can use your HSA balance to cover the premiums, although some limitations apply.

[00:06:07] In all of these scenarios, you have the ability to use money that was never taxed, either on the front end when invested, or on the back end when withdrawn. Think about that. If you're in the 25% tax bracket, it's like getting a 25% discount on all of your medical expenses or whatever you end up spending the money on. You can also take the money out for non-medical expenses after you turn age 65 and pay income tax on the withdrawal, but incur no penalty.

[00:06:38] Assuming you could afford to pay your medical expenses out of pocket before you retire, accumulating funds in an HSA account can be a great option to consider. You just listened to the post titled The Health Savings Account Strategy That Not Enough People Are Talking About by Renda Chappelle-Wolk with FinancialFinesse.com 4th of July savings are happening now at the Home Depot with select appliances starting at $398.

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[00:08:30] This is a job for Indeed sponsored jobs. HSAs are the only investment vehicle that have a triple tax advantage in that you contribute tax-free, they grow tax-free, and you can withdraw tax-free when used for qualified medical expenses. To fully optimize this account, you could pay your medical expenses with your cash on hand and allow tax-free compound interest to keep working its magic in your HSA. You'd simply keep the receipts

[00:09:00] since there's no limitation on when a healthcare expense is incurred and when it's reimbursed. And if cash gets tight for living expenses at some point, you can submit the receipts for reimbursement. For most retirement accounts, withdrawing money at a time of a cash crunch is usually done by either accepting a 10% early withdrawal penalty, withdrawing Roth IRA contributions, or by taking a loan on your 401k. For the HSA, the funds are accessible before age 59 and a half

[00:09:30] if used on qualifying medical expenses. Adding to the flexibility, the list of medical expenses that the IRS views as qualified is long. It includes items such as doctor's visits, dental exams, lab fees, physical therapy, long-term care, and Medicare premiums. While the HSA does have a 20% penalty if funds are withdrawn and not used for qualified medical expenses, after age 65, this penalty drops off.

[00:09:57] So if you find yourself over 65 and in a situation where you need to tap your HSA and don't have enough medical expenses, the withdrawals are taxed but not penalized. In other words, you still receive the tax-deferred contribution from the years prior and all the tax-deferred growth while only losing the tax-free withdrawal, similar to the tax benefits of an IRA. But unlike an IRA, the HSA does not have required minimum distributions. None of us know

[00:10:26] what our healthcare needs will be later in life, but I think it's safe to assume that as we age, our healthcare needs will increase. For that reason, and for all the benefits an HSA offers, I think this vehicle should be more highly regarded in all of our portfolios. And that's a wrap for another Thursday show. Have a great rest of your day, and I'll be back tomorrow where your optimal life awaits. And I'll be back tomorrow.