Afford Anything - Ask Paula - The Early Retirement Episode

Episode Date: September 11, 2017

#94: Early retirement? Yes please. This week, I answer questions from the audience community around early retirement planning, health savings and debt pay-off. I'm interested in early retirement. How can I avoid early withdrawal penalties? How does early retirement impact the 4 Percent Rule? Should I use an HRA or an HSA? How do I open a Roth IRA? If you’re into early retirement, don’t miss today’s episode. For complete resources and show notes, go to http://affordanything.com/episode94 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every decision that you make is a trade-off against something else. And that's true not just of your money, but your time, focus, energy, attention. Any hour that you spend doing something is an hour that you're not spending doing something else. So the questions are twofold. What matters most to you? And how do you align your day-to-day decisions around that? If you think that you've always wanted to travel, for example, but you think that you can't afford it?

Is it really that you can't afford it? Or is it that you can't afford to travel? and have a particular car and live in a particular place and wear particular clothes and go out to eat all the time. I believe in abundance as much as the next person, but life is not an endless series of ands. This podcast explores how to make better decisions, how to decide what those tradeoffs and those choices are going to be. Because managing your money is just a proxy for managing your life. My name is Paula Pat. This is the Afford Anything podcast. Every other week, I answer questions that come from you, the listeners.

And this week, our first question comes from Christiana. Hey, Paula, it's Christina calling from Sacramento, California. I absolutely love the podcast, and I happen to adore you, too. I also follow you on Instagram, which is a great follow. I absolutely recommend it to everyone out there. My question is about the possibility of really retirement, quote retirement, or just financial independence early. My husband and I are interested in having that option,

but we're realizing that 90% of our funds are in pre-tax dollars in our companies 401K, which would be subject to penalties if we took it out before 59.5. We're in our 30s, so if we wanted to retire in 10 or 15 years, which is very doable. and plausible, we would be subject to those penalties, is my understanding. And so my question is about the types of accounts you would recommend for someone interested

in an early retirement or just financial independence. We do have some money in Roth accounts and regular old Vanguard investments, and we can continue to pile that away, but most likely due to the limitations specifically with the Roth and the advantageous nature of the 401K that our companies have and matches and all that, it would probably only be about 50% of our nest egg when we get there. So those are some thoughts. And my second-ish question is, when you look at the 4% role of withdrawing an income out of your nest egg

and theoretically not reducing the principal amount, Can we take almost all of the money out of our post-tax dollars before we're 15 and a half? And then when that magic age comes around, switch to post-tax dollars? In other words, does the 4% rule still work? We're probably still going to work when we quote retire, but we really want to make sure we have all the facts straightened out before we really start to lean into the plan. Thanks for any input that you have, Paula. And thanks for everything that you do.

Bye. Hey, Christina. Thanks for asking that question. Thank you so much for being a long-time listener and for being an Instagram follower. I actually just met a listener the other day, a woman named Nicole. Hi, Nicole. Shout out to you. She recognized me through Instagram.

And she said she wasn't sure if it was me or not. But then I spoke and she heard my voice and that's when she knew it was me. So we met and we had an awesome conversation. That's a little magic that happens. So in response to your question, I hear two parts to your question. question, right? Question one, if you're interested in early retirement, what accounts should you use in order to avoid early withdrawal penalties? So that's Q1, and then Q2 is how does an early retirement impact the 4% rule? So let's go through both and we'll start with that first one, what account should you use or what strategy should you use to avoid early withdrawal penalties? Here are a few approaches. Number one, as you mentioned, the Roth IRA. Now, at your age, since you're you're under 50, you can contribute up to $5,500 per year of earned income into a Roth IRA, assuming that you income qualify. The advantage to this is that you can withdraw your principal contributions penalty-free.

You'll have to keep the gains and dividends invested, but you can take out the initial contributions at any time. So this is an excellent account to tap when you go into an early retirement. However, you know, the advantage is that it's easy. the disadvantage is that you can't put much money in there. Like I said, only $5,500 per year. That's not very much. It's a start. It's something, but it's not that much.

So let's move on. The next option is the HSA account. Now, in the next question that I'm about to answer on today's episode, I'm going to super nerd out on the HSA. So right now, I'm not going to talk about what an HSA account is because we're going to really dive into that soon. But essentially, the thing that you need to know right now is that HSA accounts are also epic early retirement accounts with triple tax benefits. The advantage is that they're easy.

They have massive tax benefits. And you can withdraw money penalty free. I'm going to go into those details in about 10 minutes. The disadvantage, once again, is that you can't put that much money into an HSA account. The IRS has announced the contribution limits for HSA accounts for the year 2018. those limits are only 3,450 annually for self-coverage or 6,900 annually for family coverage. So what does that mean? Between the Roth IRA and the HSA combined, assuming that you qualify for both, and assuming that you're under 50, which you are, and assuming that your HSA is for a family health plan, you can contribute a maximum of $12,400 per year, which is a. Again, a fantastic start, but it's not enough.

But I would definitely start there because that's 12,400 a year that you can put into accounts that you can easily access without penalty when you retire early. Now, what do you do for the rest of the money? You have a couple of options. One of them is known as the Roth conversion ladder. And here's how it works. When you quit your job, roll your traditional 401k money into a traditional IRA. These two accounts have similar tax treatments, so this conversion has no penalties and no tax consequences. Now, during year one of your retirement, since you will be in a lower tax bracket, at that point, make a conversion from your trad IRA into your Roth IRA.

You will pay taxes on this conversion so you don't want to convert the full amount. You'll want to convert approximately as much as you'll need for one year's worth of living. So step one, roll from a 401k into a trat IRA. Step two, roll one year's worth of living costs from a trad IRA into a Roth IRA. Step three is to wait for five years. During those five years, you're going to need another source of income, obviously, living on HSA funds. So the Roth IRA and the HSA that we just discussed earlier, these five years are the years in which you'll want to be living on that. I hope this is making sense.

So you retire. And then years one through five, you live on Roth IRA and HSA money. And in year five, you can withdraw the money that you have converted from a 401K to a Trad IRA to a Roth IRA. So after five years, you can withdraw the converted money that's in your Roth account without paying penalties or additional taxes. So again, let me go over that. I realize that's confusing and it's a lot of steps. So, you know, unfortunately, the way that the rules are written, your strategy does have to be a little bit complicated. But basically, here's how it works.

At the beginning of year one, you'll convert money from a trad IRA to a Roth IRA, which you will withdraw and spend at the start of year six. At the beginning of year two, you'll convert money from your trad IRA to your Roth IRA, which you will tap at the start of year six. from your trad IRA to your Roth IRA, which you will tap at the start of year seven. At the beginning of year three, you convert money that you tap at the start of year eight. At the beginning of year four, you convert money that you tap at the start of year nine. Beginning of year five, you convert the money that you tap at the start of year 10 and so on and so forth. So once a year, every year, you convert money that you can then access five years down the road. And again, that conversion is from your trad IRA to your Roth IRA.

And again, just to reemphasize, the money that is in your TRAD IRA originally was the money in your 401K. So at the time of retirement, you converted from your traditional 401k into your traditional IRA. And from that point forward, you then subsequently started making these Roth conversion. That's why it's called a Roth conversion ladder. You're laddering the conversion from Trad IRA to Roth IRA by converting one year's worth of living in order to reduce the tax consequences, and you're doing that once a year, every year in perpetuity for the duration of while you need it. So basically, every year between when you retire to when you turn 59 and a half. What this does is it allows you to tap your traditional 401k

income without taking penalties. That's the reason that this is so complicated is because it's a workaround that allows you to withdraw the money from your 401k without facing those penalties. And because it's a workaround, it has so many different steps that you have to follow. Now, one more thing to bear in mind is that you'll only need to do this for a couple of decades, at the most, because if you retire at, say, age 40, then you'll only need to follow the strategy for 19.5 years, because when you turn 59.5, you can withdraw the rest of your 401K funds or any other retirement funds in the conventional way. So if you're living on Roth IRA and HSA funds from years one through five, then you'll only, again, assuming you retire at the age of 40,

you'll only actually have to follow the Roth conversion ladder strategy for 14 and a half years. So it's not like you're going to be doing this every year for the rest of your life. So I guess TLDR, years one through five, you'll need to find other sources of income to live on. And after year five, you can tap the money that's in your 401k by executing this conversion ladder strategy. At the risk of complicating my answer, that's actually not your only option. There is another strategy as well. And this other strategy is known as the SEPP 72T strategy. You down with SEPP, yeah, you know me.

SEPP, yeah, you know me. Here's how this works. At the time that you retire, you'll transfer all of your retirement accounts into your traditional IRA. So your traditional 401K, all of that, all of that goes. into your trad IRA, just as it would if you're following the previous strategy, the Roth conversion ladder strategy. But under the 72T approach, instead of then converting from a trad IRA to a Roth IRA, you would instead use an IRS calculator to calculate three possible withdrawal amounts. So there's an IRS document. I'll link to it in the show notes,

which is at Afford Anything.com slash episode 9. using this IRS document, what you can do is calculate whether you want to withdraw money based on required minimum distributions, fixed amortizations or fixed annuity. There are these different approaches that are all outlined in this document by the IRS. So what you would do is you would retire, transfer money into a trad IRA, use the IRS document to calculate the three possible withdrawal amounts that you qualify for, choose one of a one or three possible withdrawal amounts that you qualify for, choose one or one or. of those three amounts, whichever one appeals to you the most, and then withdraw and pay taxes on that amount every year. In other words, you will be choosing a fixed amount of money that you will withdraw in equal increments every year. And you will continue this. You will have to continue this based on IRS rules for at least five years or until you turn 59 and a half, whichever period

is longer. And that's another way of saying that if you're tired at the age of say, 57, then all of this effort might not be worth it. But again, if you retire at the age of 40 or 45, then it could totally be worth it to follow the SCPP-72T strategy, because it is yet another strategy that allows you to make withdrawals from pre-tax retirement accounts without facing any penalties. And the other advantage to this approach is that unlike the Roth conversion ladder strategy, you can start making these withdrawals immediately. You won't have that. that gap between years one and five that you'll have to plug. So those are two choices, and you can pick either one, whichever one appeals to you the most. The big kind of asterisk

that I would leave here is that regardless of which strategy you choose, hire a CPA, hire a tax professional, and make that person your new best friend, because this is a field in which you want to make sure every I is dotted and every T is crossed. If there are any oversights, if you accidentally withdraw the incorrect amount or if you don't meet a particular deadline, then there could be very stiff penalties. So the cost of hiring an accountant to guide you through this is absolutely worth it. Now that said, let me speak to the second part of your question, which is how does early retirement impact the 4% rule? Now, first of all, for the sake of listeners who aren't familiar with the 4% rule, here's what that is. The 4% rule of thumb states that

a retiree can withdraw 4% of their portfolio in the first year and 4% adjusted for inflation every subsequent year and still maintain a reasonable likelihood of not outliving your money. So in other words, if you have a retirement portfolio of $1 million, you can withdraw $40,000, which is 4% of a million. You can withdraw that $40,000 the first year and $40,000 adjusted for inflation every subsequent year, assuming that you have a balanced portfolio of stocks and bonds. That is known as a 4% rule of thumb, and a lot of retirees, both early and traditional, use it as a benchmark, a guidance benchmark for how much money they can withdraw from their

portfolio once they retire. Now, your question was how does early retirement affect the 4% rule? If you decide to access your funds by using the SCPP-72-T method, then it totally throws the 4% rule out the window because you're going to be determining your withdrawal rate based on IRS regulations, not based on 4%. So you can completely forget about the 4% rule of thumb in terms of your actual withdrawal strategy if you're using SEPP 72T. If, on the other hand, you decide to use the Roth conversion ladder strategy, which is the every five year strategy, then you can convert 4% per year and withdraw that money five years later. You can convert any amount that you choose.

So the 4% rule of thumb holds here because there are no IRS rules telling you how much to withdraw. Now, the other thing is that when we talk about the 4% rule of thumb, we're talking about withdrawing 4% of your overall portfolio. So yes, years 1 through 5, for example, you might be living on principal contributions that you made to your Roth IRA as well as HSA contributions. and it's going to seem like you're withdrawing a significant amount of money more than 4% from those specific accounts. That's fine. Those specific accounts are arbitrary. What matters is your portfolio as a whole, not withdrawals from each individual account. So in other words, as long as you're withdrawing 4% from your portfolio as a whole,

then whether you're pulling that 4% from basket A versus basket B versus basket, at C is arbitrary and based on tax rules. Now, by the way, for those of you who are wondering where the 4% rule of thumb came from, so it comes from these Monte Carlo simulations in which researchers look at historic market returns and historic inflation rates assuming any given date as a starting point. Because, you know, in retirement, the starting date is the wild card because a huge market dip at the start of your retirement is, of course, a gamble, right? So researchers have run these simulations.

looking at historically, if people followed this strategy, would it work? Would people be able to sustain their portfolio throughout their retirement? And in the overwhelming majority of cases, it does. Now, it's important to note that the Monte Carlo simulations assume a 30-year retirement. But when you project this into the future for a longer retirement, the 4% withdrawal rule can still work, particularly if you stay flexible. because the thing is, the biggest risk to the 4% rule of thumb is its inflexibility. The major risk is that the 4% rule of thumb, as written, suggests a one-size-fits-all flatline approach.

And so you can reduce your risk by withdrawing less from your investments, or in other words, by holding when the market is down. In times of market declines, withdraw a little bit less. If there's a big recession, withdraw 2 to 3%. rather than four, and then get a little side income. If you're young, if you're retiring at the age of 40, you can certainly do that. And that flexibility is true security. Security comes from having multiple streams of income and having flexibility and being able to roll with the punches and not clinging to a withdrawal rate of precisely 4.000

percent, regardless of what's happening in the market. So long as you can do that, you'll probably be okay. So that is how you tap retirement funds from pre-tax retirement accounts in an early retirement. Thank you so much for asking that question. And again, in the show notes at afford anything.com slash episode 94, I'll link to several resources that can help you if you are interested in either the Roth conversion ladder strategy or the SCPP 72T. We'll come back to this conversation about early retirement and health savings accounts in just a moment. But first, I want to talk about one of the most fun aspects of financial independence, which is that you get to travel a lot.

For me, for example, so it's currently mid-September, and in the next two and a half weeks, I'm flying to Portland, to Denver, and to Ecuador. I'm doing all those trips just in the remainder of the month. Now, because I travel so much, it's important to me to have luggage that makes sense, luggage that's lightweight and durable and organized, and I was really thrilled to bring away travel on as a sponsor. Away Travel is a company that was founded by these two friends in New York who one day found themselves at JFK Airport. Their flights were delayed.

Their cell phones were dead. And they looked at each other and basically said, you know what? We should create luggage with power. And so what's awesome about the luggage that Away Travel creates is that there are built-in USB outlets in the luggage. And what that means is that you can charge all cell phones, tablets, e-readers, anything that's sort of powered by a USB cord, you can charge that from your carry-on. And a single charge on the away travel carry-on will charge your iPhone five times. So basically, if you have this luggage, you're traveling with power. And that's pretty awesome. On top of that, like I said,

it's lightweight, it's durable, it has the 360-degree spinner wheels, it has a built-in TSA-approved combination lock. And my other personal favorite aspect of it is that it has a bunch of different compartments so you can keep all your stuff organized. Plus it has a removable, washable, laundry bag where you can throw all your dirty clothes. So if you want to give them a try, for $20 off a suitcase, visit awaytravel.com slash Paula and use promo code Paula during checkout. They'll give you a 100-day trial, so if you don't like it, you can return it for a full refund, no questions asked, and there's also a lifetime warranty.

Again, for $20 on. Off a suitcase, visit awaytravel.com slash Paula and use promo code Paula during checkout. Give it a go. Let me know what you think. I want to give a shout out to Bluehost. If you're interested in starting your own blog, check out Bluehost. They're a company that offers hosting, which is basically the term for the space on the internet where your blog lives.

Absolutely fantastic if you are getting started as a blogger and you need hosting and a domain name. You can learn how to set up a blue host account in five minutes or less by visiting afford anything.com slash start a blog where I've got a full set of detailed instructions, step-by-step guide, including screenshots of every step along the way plus a YouTube video. Check that out, affordanything.com slash start a blog. Our next question comes from Kate. Hi Paula, long-time listener, first-time caller. My name's Kate, and I live south of Boston with my husband. My question is regarding 401k's pensions and using an HSA as a retirement vehicle. To provide some context, as I mentioned, I live south of Boston, and as you can imagine,

my mortgage payment and associated property taxes are more than I would like to admit. I make nearly six figures a year. With that being said, I'm in the process of paying off my debt by rolling it all into a 0% APR credit card. I am not currently saving anything beyond my retirement accounts while I'm paying down my debt. My company puts 2% into my 401k regardless of any contributions and will match up to 4% of any contributions made. With company match in my contribution, there is 10% of my salary being put monthly into my 401k. I want to be clear, I'm not leaving any company match on the table here. My company also has a pension plan of which I cannot make contributions to, but 4% of my salaries being placed there.

Here's my question. I'm coming up on open enrollment and have the option of switching from an HRA health plan to an HSA plan for which my company will automatically contribute $750 angrily. For the most part, I don't have any regular medical expenses and only visit the doctor maybe twice a year. Should I look to switch my plan from an HRA to an HSA while I have this opportunity despite not maxing out my 401K? Or should I wait until I pay down my debt and max out my 401K before adding on yet another retirement vehicle? Thanks for your help. Kate, thanks so much for asking. So here's what I'm going to do. First, I'm going to restate your situation in my own words. And then we're going to talk about the answer. So here's how I understand your situation. You have a mortgage and you have credit card debt. Your mortgage amount is higher than you'd like. And your credit card debt is an undisclosed amount. You are transferring the balance to a credit card with a zero percent interest rate. And hopefully you can pay that off in full before that teaser rate expires. you are currently redirecting some of what would otherwise be your retirement money towards your debt payoff, which, by the way, is an excellent idea.

So in terms of your retirement, right now you have a 401k, you're contributing 4%. Your company contributes a total of 6%, which means that 10% of your salary goes into your 401k. You also have a pension and your company contributes 4%. So overall, 14% of your salary is getting saved into retirement accounts. and you're also getting the maximum possible company match. So what I hear there is that you are doing awesome in terms of saving for retirement. I would, in terms of the amount that you're saving, I would not change a thing currently until you have your credit card debt paid off. Once you've got that paid off, then of course you can up the amount that you're saving for retirement.

But in terms of where you are at this present moment, I think you're making all the right decisions. Now, as to your question, your question is, should you, open an HSA or should you stick with your HRA? If you have an HSA, your company will contribute $750 annually. And if you stick with your HRA, your company will contribute some unknown amount. So let's answer that question. Now first, in order to give context to the rest of the people who are listening so that everyone tuning in can follow along, I'm going to answer this in three parts. First, I'm going to define the difference between an H.R. and an HSA.

Then I'm going to compare the two. And then I'm going to talk about the answer specifically for you, as well as kind of tips for anybody else listening who might have a similar question. An HRA is a health reimbursement account. It's an account that's owned and funded by the employer. And the money inside of it can be used by the employee for health-related expenses. So here's how it works. The employer sets up an HRA for every participant. and then the employer puts money into the HRA account.

The participants, and that's you, Kate, can use the money that's inside the HRA to pay for qualified medical expenses. Now, this money is not income. It's money that belongs to your employer. It's a line item on your employer's balance sheet, not on yours. So it's not part of your net worth. But you can use this money to pay for certain medical expenses. Now let's compare that to an HSA. An HSA is a health savings account.

And this is an account that's owned and funded by you, by the employee, or by the individual. So individuals make tax deductible contributions into an HSA. And then while that money is inside of your HSA, it grows tax deferred. So money inside of an HSA can, for example, be invested in a broad. market index fund, and then all of that growth is tax deferred for the lifetime of the investment just as it would be in a traditional 401k. And unlike in an HRA, the money in the HSA is yours. It's your contribution. It's absolutely a line item on your own balance sheet and it's part of your net worth. And for many people, particularly early retirees, it is a staple part of

an early retiree strategy. So here's the thing about HSAs. If you spend money in your HSA on qualified health expenses, then you don't get taxed on those withdrawals. So essentially, an HSA allows you to pay for health care expenses with tax-free dollars. That's what it's designed for. Now, here's where it gets even better. There's this practice that is common among the financial independence early retirement community called HSA hacking. And we call it hacking because we're using the. HSA for purposes beyond its original design. So essentially, we in the FI community are HSA

enthusiasts who have figured out how to hack it to its maximum benefit. And yes, I just did describe myself as an HSA enthusiast, which probably tells you a lot about me. Hashtag nerd, hashtag HSA's and beer pong. All right. So here's the hack. If instead of using HSA money to pay for qualified health expenses, like if instead of doing that, you chose to pay regular out-of-pocket after-tax ordinary dollars for your health costs, then the money that's inside of your HSA would continue to grow tax-deferred. And again, assuming that that money is invested in, say, equities or bonds, we'll say a broad market index fund, like a passively managed S&P 500 index fund, then that tax-deferred growth over the long term could

up being substantial. That's why having an HSA is kind of like having a supplemental retirement account. It's an opportunity for you to put even more money into retirement accounts than you otherwise would or could. So again, just to review it for the sake of everybody listening, and Kate, I'm sure you are probably already familiar with this, but I'm just going over this for the sake of the audience, the broader audience. HSA hacking is the practice of paying for your health expenses out of pocket and then as long as you save the receipt, you can reimburse yourself for making that payment at any time, which means that if you have a surgery and it costs $10,000, you pay out of pocket,

you can reimburse yourself immediately, or if you choose, you can reimburse yourself one year later, five years later, 10 years, 20 years, 30 years, 50 years. So which means that if you're willing to wait before you reimburse yourself, then the money will continue to grow tax deferred. And when you withdraw it, that withdrawal, because it's backed by a receipt, is tax exempt. So you end up with a triple tax benefit. Your contributions to an HSA are tax deductible. The growth inside of that HSA is tax deferred.

Withdrawals that are backed by a receipt for qualified medical expenses are tax exempt. and any money that's within your account that is beyond what you've paid for, like any money within the account that you cannot withdraw to support a qualified medical expense is just money that you would withdraw once you reach traditional retirement age in the same way that you'd withdraw it from a Trad 401K. In other words, if there ends up being more money in the account than you have receipts for, then once you turn 59 and a half, that excess money is treated in the same way that any other pre-tax retirement account money would be. So TLDR, the HSA kind of gives you the benefits of both a traditional account and a Roth account combined if you have health care expenses.

And if you don't have any health care expenses, then the HSA essentially acts like an additional or supplemental Tad 401K. So that's the background. So let's go to the kernel of your question. which is to compare an HRA to an HSA, right? So core difference number one, the employer owns the HRA and the employee owns the HSA. So the money within your HSA is yours. It's your asset on your balance sheet. The money within your HRA can be used by you, but it is not an asset that is owned by you.

That's one core difference. And more broadly speaking, I think what that requires. flex is that HRA money is intended to be spent, and H.S.A money is intended to be a long-term savings account. You know, it's right there in the name. It's a health savings account. So it's intended to be a savings account, which can be used either for medical expenses or for retirement. And one very obvious way, by the way, that this difference manifests itself is that HRA funds can be used to pay insurance premiums. Why?

Because HRA money is money that's meant to be spent. That's what it's there for. HSA funds cannot be used to pay insurance premiums because the HSA is designed for long-term savings. And no account that's designed for long-term savings would ever, you know, give you the ability to use that money on insurance premiums that would defeat the purpose of designing an account for the sake of long-term savings. So that's a comparison between the HRA and the HSA.

Now, Kate, as to your question, I'm going to answer it in two ways. One that's a specific answer for you and the other that's a broader answer for anyone else listening who has a similar question. So, Kate, specifically for you, at this point, you have credit card debt. And it's essential that this debt gets paid off as quickly as possible before your 0% teaser rate APR account. expires. And I don't know when that's going to expire. I assume that's going to be anywhere between six to 18 months from now. So, TLDR, you need to get this debt paid off fast. While you have credit card debt, I would stick with the HRA. And the reason for that is that you can use the funds in your HRA to offset some of the cost of your insurance premiums, which in the short term

allows you to put more money towards your credit card debt. So for example, I don't know how much you pay monthly for your insurance premiums. Of course, that depends on what percentage is subsidized by your employer and what percentage is born by the employee. But let's just assume, for the sake of example, that you pay $100 per month out of pocket for your insurance premiums. And let's assume that your company contributes 750 annually to your HRA. That means your company is contributing $6.250 per month. So every month, what you could do is file for a 6250 reimbursement from your HRA for your insurance premium and then pay an extra 6250 towards your credit card debt. Or if you want to be extra badass, you can just round it up to 70 because you're not going to miss the extra $8.

And anyway, that money, that money that is the HRA contribution that you're using towards your insurance premiums, that can now become extra payments that you put towards your credit card debt. So Kate, because you want to repay this debt, that's my specific answer for your situation. Now, for anybody else listening who in a broader, more general sense, is trying to choose between an HRA versus an HSA, here are two questions that I would urge you to consider. Number one, do you need to switch health plans in order to have an HSA? Because in order to be eligible for an HSA, your insurance plan needs to be an HSA qualified high deductible health plan. And if you're currently already in one, then cool, you can be in the same plan, regardless of whether you choose HRA versus HSA. But if your current health plan is not

HSA compatible, then you would need to switch plans. And so that's just something to consider. I'm not saying that you shouldn't. I'm just saying you would want to look around at what the compatible options are that your employer provides. So that's question number one. Question number two, and this is where we really get into the, you know, early retirement, how long are you going to stay at your job? Money inside of your HRA belongs to your employer and is not portable. So if you quit your job or you retire early or you get laid off, you lose the money inside of your HRA because it was never yours in the first place. So if you don't think that you're going to be at your job for that much longer, then it makes more sense to opt for the HSA. Because you can carry that money with you as you move from job to job or as you move from job to early retirement or to self-employment.

So for the general person, that's what I would say. But for you, Kate, since you're trying to pay off your credit card debt, get the HRA and use it in order to help you accelerate that debt pay off. Our next question comes from Paola. And it is about one of my favorite topics in the world. Paula, how are you? My name is Bola. And my question is, I listened to one of your podcasts yesterday. I'm trying to buy Roth IRA.

Can you recommend the process, the best process, the best company to go about this? Thank you so much. Roth IRA! Oh, you have no idea how excited I get when somebody tells me that they want to open a Roth IRA. This is like my birthday and Christmas combined. Okay, so what's the process for opening a Roth IRA? Good news. It's super, super simple. The Roth IRA is not tied to any employer. It doesn't matter if you are employed or self-employed or what it doesn't matter. That status doesn't matter. Your Roth IRA, IRA stands for individual retirement account. So this account belongs to you. It belongs to the individual. So you don't have to deal with anything employer related at all. You just pick a brokerage, any brokerage that you want. Personally, the one that I recommend is Vanguard. And I recommend them for two reasons. Number one, Vanguard is a co-op. So other brokerages have owners and then there are clients or customers, right? Vanguard is, Vanguard's a co-op. It's entirely member-owned. So there's no conflict of interest between the ownership and the regular everyday people who are in it. It is completely member owned. For those of you who are familiar with the outdoor clothing store, REI, Vanguard is the REI of finance brokerages.

So that's one of the reasons that I recommend them so much. The other reason is that they have basically some of the lowest fees on the market in terms of the expense ratios of their index funds. Vanguard, Charles Schwab and Fidelity are the three low fee brokerages. And if you look at the expense ratios on their index funds, they're all neck and neck. In fact, it's kind of fun to watch because over time, they go into this race to the bottom where one of them will lower their fees by like a fraction of. of a percent. And then the other ones, in order to be competitive, will lower their fees by an additional fraction of a percentage. And then very incrementally, they all just keep lowering their fees in an effort to be the cheapest ones, which is great for us. So yeah, so in terms of the price that you pay for your, on the expense ratios for the index funds, Vanguard Schwab and Fidelity are all really awesome. Of those three, Vanguard is the only one that's member owned. That's the reason that I'm such a big fan of it. Anyway, and by the way, I have no financial relationship with them whatsoever other than just being a normal everyday regular customer. Anyway, so what you do is just go to

vanguard.com and open an account. It's pretty much that simple. You can register entirely online. Once you open the account, you will link it to a bank account, and you can fund this account with, if you're under the age of 50, up to $5,500 per year of earned income. Now, the big ask strict there is that it needs to be earned income, meaning if you have a year where you have, where you don't make any money in terms of like what you would report to the IRS, then, you know, if you have a year where your income falls to zero, you can't, you can't put anything into your Roth IRA because you didn't earn anything that year. But as long as you are reporting to the IRS that you have earned income of at least $5,500, you can put all of that into your Roth IRA.

and you would do that just by creating the account on Vanguard and then linking a bank account to it. Or, you know, if you wanted to do it the old-fashioned way, you could also mail them a check. That would work too. When you open the account, it's very straightforward and it's all online. You know, you'll just need basic information like your name, your address, date of birth, social security number, like all of that identifying information. It's very similar in practice to opening a bank account or opening any other type of financial account. So, yeah, that's the scoop. I'm really excited your opening one. Congratulations.

So that is the show for this week. Thanks so much for tuning in. By the way, for those of you who are based in Portland, this upcoming week, the week of September 12 through 15, I will be back in your town and I'm going to host some sort of audience meetup. I don't know exactly when or where. Like I'm missing some important details here, but it'll be sometime this week. and just to head over to Instagram at Paula Pant where once I figure out the date and time and place, I will announce it there. But basically, whenever I come there, people are very generous

and they're always like, hey, we'd love to meet you for coffee, we'd love to have a beer with you, we'd love to show you around. So I'm like, you know what? I travel quite a bit. I'm going to start just hosting meetups, which are basically, I'm just going to show up at a particular place at a particular time. There's no agenda.

There's no plan. I'll just be there drinking a beer. and if anybody wants to join me, you're more than welcome. There's literally no plan other than let's just hang out and have some beers and kick back and meet each other face to face. So, yeah, I'll be doing that in Portland this week and more to come in various other places in the future. So cool. Thank you all so much for tuning in. This is the Afford Anything podcast.

My name is Paula Pant. I'll catch you next week. Oh, and, ooh, by the way, coming up next week is an interview with J. David Stein, also known as J.D. Stein. He is the host of the podcast, Money for the Rest of Us, and he's going to be spilling the beans on how he manages his money. Coming up in upcoming weeks is an interview with Pete McKitis on How to Be Awesome at Your Job. And on October 23rd, we're going to be airing the 100th episode. 100, it's 100. We're in the three digits.

So I have a very special guest planned for that one. I'll be recording that interview this Sunday. So I will, oh, should I announce it? No, you know what? I'm going to keep it a secret. Okay. So, but yeah, October 23rd, 100th episode, be there or be square? Being square really doesn't sound that bad, does it? I mean, like, I mean, of all shapes to be, square is just certainly preferable to, like, hexagonal. All right, well, on that note, I'm Paula Pan. This is the Afford Anything podcast. See you soon. This is like my birthday and Christmas combined.