The Personal Finance Podcast - How to Open an HSA (and Why You Should Consider it!) - Money Q&A

Episode Date: October 9, 2023

In this episode of the Personal Finance Podcast, we're going to answer these questions: How do I open an HSA? How Do You Transfer Funds from One Brokerage to Another? Should I save for a Down Payment or Retirement? When Should I Slow Down 401(K) contributions and add money to a Roth?   How Andrew Can Help You:  Join The Master Money Newsletter where you will become smarter with your money in 5 minutes or less per week Here! Learn to invest by joining  Index Fund Pro! This is Andrew’s course teaching you how to invest!  Watch The Master Money Youtube Channel!  Ask Andrew a question on Instagram or TikTok.  Learn how to get out of Debt by joining our Free Course  Leave Feedback or Episode Requests here.  Thanks to Our Amazing Sponsors for supporting The Personal Finance Podcast. Shopify: Shopify makes it so easy to sell. Sign up for a one-dollar-per-month trial period at  shopify.com/pfp Chime: Start your credit journey with Chime. Sign-up takes only two minutes and doesn’t affect your credit score. Get started at chime.com/ Listen to Planet Money wherever you get your podcasts. Policygenius: This is where I got my term life insurance. Policygenius is made so easy. To get your term policy go to policygenius.com and make sure your loved ones are safe.  Links Mentioned in This Episode:  Should You Max Out Your Roth IRA or HSA? (Money Q&A) The Super Retirement Account (HSA) How to Run the Numbers When You Buy a House! (Total Cost of Ownership!) Connect With Andrew on Social Media:  Instagram  TikTok Twitter  Master Money Website  Master Money Youtube Channel   Free Guides:   The Stairway to Wealth: The Order of Operations for your Money  How to Negotiate Your Salary  The 75 Day Money Challenge  Get out Of Debt Fast  Take the Money Personality Quiz Learn more about your ad choices. Visit megaphone.fm/adchoices

On this episode of the Personal Finance Podcast, how to open an HSA and why you should do it. What's up, everybody, and welcome to the personal finance podcast. I'm your host, Andrew founder of MasterMuddy.com. And today on the Personal Finance Podcast, we're going to be talking about how to open an HSA and why you should consider it. If you guys have any questions, make sure to hit us up on Instagram, TikTok, Twitter, at Master Money Co. and follow us on Spotify, Apple Podcasts,

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They truly mean the world to us. Now, today, we are going to do a money Q&A, and we're going to be talking about four different questions in this money Q&A. The first one is, how the heck do I open an HSA, and where should I open that HSA, and why should you open that HSA? So we're going to talk about the power of the health savings account

and the triple tax advantages that it gives. But in addition, I'm going to show you where to open one and why you should open one if your employer doesn't offer it or if your employer does offer it. Then we're going to talk about how do you transfer funds from one brokerage to another? We had a question come in where someone is actually leaving their high fee financial advisor who's charging them 2% every single year

on their asset under management. And they want to move those funds over to their own investment accounts. We're going to talk about how that works. works and some considerations that you should think about. And then should I save for a down payment or should I be saving for retirement? Someone is going through the process of saving for a down payment, trying to figure out, hey, is this a waste of time and should I be saving for retirement? If I'm neglecting retirement, we're going to talk about my thoughts on that question. And then lastly, is when should I slow down my 401K contributions and add money to the Roth IRA instead? So we'll

talk about that as well. So we have two retirement questions there. We're going to talk about the HSA and in addition, we're going to talk about how to transfer funds. So an action-packed episode on this money Q&A. So without further ado, let's get into it. All right, so the first question comes in. How do I open an HSA and can I do it even if my employer offers an HSA? So this is a fantastic question. We've actually been getting this question more frequently as we talk about the HSA. And if you don't know what an HSA is, we have an entire episode. It's one of our first episodes talking about the HSA, and we call it the super retirement account, which is what that episode is called. So you can check that episode out if you have not, but we'll talk about it more

in this episode as well. Now, the HSA is a very, very powerful account because it has triple tax advantages. But one thing to note is to qualify for an HSA or a health savings account, you have to have a high deductible health plan. Now, if you don't know if you have a high deductible health plan, you can talk to your insurance provider, your health insurance provider, and or you can talk to your employer if your health insurance is through your employer and see if you qualify for an HSA, see if you have a high deductible health plan. Because one big question people get is, hey, my employer offers an HSA, but we don't have very good investment options inside of that HSA or we don't even have investment options whatsoever. So if your employer offers that HSA, can you

open an HSA outside of your employer and what should you do about this? So the quick answer to this is yes, you can open an HSA outside of who your employer has selected. And you can choose an HSA with a number of different options. There's banks out there. There's brokerages that offer HSAs. But there are some things that I want you to keep in mind. Number one is employer contributions. Does your employer match on your HSA? If they do, if they help contribute to your HSA, it may be worthwhile as long as you have some okay investment options to consider keeping it there to get at least that employer contribution match that will allow you to have that match available. If they don't have that match available,

then you don't have to worry about that. In addition, with your HSA, they do automatic payroll with deduction. So if you don't have to worry about those deductions later on, taking that tax deduction right away, then your HSA will be able to do that if that is of concern to you. Then you want to make sure that you are looking at fees. I'm going to show you my favorite one with really low fees that will allow you to also invest in some great funds. We're going to talk about that in a second. So you want to make sure that you are considering the fees inside of this HSA account, make sure they are not charging you an arm and a leg of fees. And you want to look at this. If you never looked at this before, go look at your employer's plan. Make sure they're not killing you on fees. That is very important

to note when it comes to your employer plans is go back there, look at the fees. And if the fees are really, really high, we're going to show you a better option that could be available to you. And then also look through those investment options because HSA investment options are notorious for giving you funds and increasing the fees on the funds for some reason. So you could go out there and look at a Vanguard S&P 500 index fund, and if it's available in your HSA, sometimes they try to add additional fees on top of that. So fees are very important in your HSA.

You want to minimize those fees as much as possible because fees can destroy your progress when it comes to wealth. And even a 1% fee may not sound like it's a lot, but it is a significant amount of money when it comes to things like investing your money. So you got to make sure that when you do this, you are looking at those fees

and really, really monitoring those fees. Now, if you want to open it outside of your employer, you looked at this and you said, hey, my employer doesn't have very good investment options and or my employer does not have exactly what I need. The fees are high. I just don't love this HSA option. Well, you can open one outside of your employer. I'm going to give you the steps right here.

So number one is you want to check your eligibility, make sure you are eligible based on having a high deductible health plan. That is number one. Now, one thing to note here is, if there are seasons when you are thinking about opening up an HSA, and maybe you have situations in life where you're, you have situations in life where you you know you're going to have higher medical bills. I would much rather personally go back down from a high deductible health plan to a traditional deductible health plan when I know that I'm going to have high medical expenses.

When do I do this? For example, when my wife gets pregnant, for example, I know I'm going to have a ton of different medical expenses in that given year based on having a birth of another child, based on all the doctor visits that she's going to have, based on all the doctor visits that we are going to have after the baby is born, I switch my health plan from a high deductible health plan. So I can't contribute to an HSA during those years, but I would rather have a much better health plan available to me when I have those high health plan expenses. So I make that adjustment during those times.

There is nothing wrong with doing that. In fact, over that time frame, you're going to see over years, maybe you want to make those considerations based on different life situations where you make adjustments in some years you can contribute to an HSA and then some years you just can't. And so that is one thing to consider when it comes to this eligibility. then you want to go through and you want to research providers. Now, there are a ton of different HSA providers out there. A lot of them are way too expensive and they don't have great investment options. So I dug through all the ones that were out there that I saw. And there was one that is

just on every single credible list who knows that we are using HSAs to build wealth. There is one out there that is just head and shoulders above all else in my personal opinion. This is just my opinion. I have no affiliation with them whatsoever. I use them for mine, but I have no affiliation with them whatsoever, and that's Fidelity. Fidelity has HSAs, and at Fidelity, you have great investment options. They have the lowest fees. In fact, Morningstar has it as their number one option when it comes to HSAs. I went through a bunch of other. The college investor also has it there. He's got some great resources at the college investor. So there's just a bunch of different resources that I trust and know. And Fidelity was number one on most of their lists. So Fidelity is one

where you can go out there. You can open an account there and you know you're going to have great investment options. Fidelity is one of my top brokerages. That's where I have my kids investment accounts. I have my taxable brokerage account there. Fidelity is a great option for a lot of people. If you're looking for a low cost place to open up your HSA, you just go to Fidelity.com and you just type in HSA. And the great thing about Fidelity, and one thing I really, really truly do love about Fidelity is that they have like pretty much every single type of account that you can think of there. So like if you want a one stop shop where all of your accounts are in one brokerage in one location. Fidelity is a great option for that. I also love, obviously,

Vanguard Charles Schwab. But Fidelity with the HSA option is always number one when it comes to a lot of their offerings. So that is a great location to look at this if you're considering doing that. So you can open an account at Fidelity or if there's another place that you know, maybe you want to open it there. Then you make your contribution to that HSA and then making sure you keep your records is really, really important. So I've talked about this before. We need to create a spreadsheet on this. We're still working on it. But I have a spreadsheet that just kind of maintains my exact records on a basis of the HSA where if, like, for example, I had to go to urgent care five different times in the last month, for example. So I had to save all those receipts and keep those inside of my spreadsheet so that I

can have a total of what's in my HSA and the receipts that I utilize. And then I put the receipts inside of a Google drive or you can use Dropbox or whatever else you want to use to keep your receipts records there. And I just do them by year. I just throw them all in there. I really don't like have a perfect organization system where they're in the exact order. I just do it by year. You'll find them and then I just date them and say where they're from on there. So really, really easy stuff here. And you can do a lot of this with your phone now. As long as it's uploaded, it'll be in there. So that's the other piece. And then making sure that if you're going to do this, if you're making post-tax contributions when it comes to an HSA, that you are keeping track of this so that you can

deduct those contributions come tax time next year. You can tell your CPA or you just deduct those contributions. But that is one of the better options as well. So just make sure you keep. track of this stuff for tax purposes as well when you make those contributions to your HSA. Now, why is an HSA so powerful? An HSA has what we call triple tax benefits, meaning you have pre-tax contributions. Those contributions on an HSA are made pre-tax reducing your taxable income for the year. So if you contribute money to an HSA, you don't have to pay taxes on that money. And if you do it through your employer, they're usually going to leave the taxes out. Or if you do it after the fact at somewhere like Fidelity, then you will get a deduction on your tax return come tax time.

Then you have that tax-free growth. Tax-free growth, meaning if you invest those dollars, money in your HSA grows tax-free. And then you have tax-free withdrawals. As long as you have what is called a qualified medical expense, which is why we're saving these receipts, then you can withdraw the money from the HSA tax-free. But the cool thing is about this is there's no use-it-or-lose-it situation. It's not like a flexible spinning account or an FSA where you have to use these dollars. or else you lose them. In an HSA, what happens is that you can keep track of this over a long

period of time and you can reimburse yourself when you're 50 from medical expenses that you had back when you were 21 years old. There is no timeline. The IRS has no timeline there on when you have to use this money. This is why it's very, very powerful because it can help you bridge the gap, especially if you retire early. This can help you bridge the gap along with your taxable brokerage account to get to the point where you retire early and then you're 59 and a half and you have some of those retirement accounts available to you. So having flexible options like this is very, very powerful. And that's why another reason why I just love, I love the HSA. I love that you can invest those dollars in there. And this might be, honestly, the HSA might be my favorite account.

Roths are really, really high up there. But because of these triple tax benefits, you want to reduce your tax liability as much as possible when you're a wealth builder like you and I. So we want to make sure that we are reducing that tax liability significantly. They also have no RMD. So HSAs do not have required minimum distributions, allowing you to let your investments grow tax-free for as long as you want. And then also, you can also use them as health care costs when it comes to retirement medical expenses. So that's another big factor that you want to think about, because medical expenses are going to go higher and higher as you age. And so you want to make sure that you have a nice nest egg for that. And HSA is a great tool for this so that you don't have any financial

issues going into retirement. You got a big nest egg there that's going to allow you to do. do this. They also have post-retirement withdrawal. So after the age of 65, you can withdraw funds from your HSA for any purpose without penalty, although those withdrawals, when you withdraw them for things that are not qualified medical expenses, are going to be taxed as income. So this is very similar to basically it turns into an IRA, which is a very cool thing. You're just going to be taxed on the money, but if you have a qualified medical expense, then you're not taxed with the money. So it's a really, really cool, interesting thing. And you can also pass an HSA down to your spouse tax free upon death. So this is also another great benefit to it because it makes it a

valuable component of estate planning. So this thing just has benefits all over the place. It's kind of hard to find the things that are not a benefit there. The number one thing that I wish was different was it worked like a Roth IRA instead of an IRA when you turned age 65. That would make it the ultimate account. It would be like the only account I focused on if that was the case. You wouldn't have to pay taxes when you pulled it out either after 65. That would be pretty pretty cool. But I'm just dreaming on that, the IRS would never probably go for that. The taxman wants its money. Now, the next piece is there are contributions limits every single year and it depends on if you're a single filer or a family. So you got to make sure you take those considerations into account every single

year. And then there's a ton of different strategies to max them out. But the HSA is powerful because of these reasons. It's powerful because you have those triple tax benefits. You can grow this money over time and you really have a bridge to the gap of being able to pull that money out, especially if you have those qualified medical expenses. So love, love the HSA for all of these reasons. And if you have those qualified medical expenses, they will rise as you age. You can use those to reimburse yourself tax-free. So HSA is super, super powerful. If you've never heard of it, make sure you check out our entire episode on the HSA. We call it the super retirement account because of how powerful it is with those triple tax benefits. And I appreciate the question. Hope this was extremely helpful. Like I said, if you're going to open it outside of your employer, I would

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Find your advisor at IDPrivatewealth.com. Next question. Can you educate me on what happens with your funds when you transfer them? We are leaving our full service financial advisor and would like to go to a three to six fund portfolio. Currently, we are in several funds, as advisors tend to do. Do you transfer exactly all your funds as they are, or how would we get down to three to six funds? We would love to sell and would there be taxes? Or would we have to sell and would there be taxes?

All right. So when you take your funds from one location to another, it's not necessarily always a one-size-fits-all situation. Sometimes you can transfer them over pretty seamlessly. And then sometimes it's a little more difficult. So typically, when you transfer funds, you're going to have the option to transfer funds that are in-kind, meaning exactly as they are, to the new account. So if you can do this, if you can transfer in-kind funds exactly as they are to a new account, this is the easiest way to get that over because you don't have to sell any of your current investments immediately and you can avoid all the potential taxes and fees associated

with selling. Now, in this situation, if you have a ton of different funds, some of these funds you are not going to like, obviously. So most likely you may have to sell some of those funds. And when you sell those funds, depending on what account those are in, that could trigger tax events. So once the funds are transferred, one thing you could do is move the funds first. So you transfer them as they are from your advisor. You transfer them over to the new location that you have. Maybe it's Vanguard. Maybe it's Fidelity. There's all these different situations. But you could transfer them over if they have those offerings at those brokerages. And then you start to consolidate after that. That would probably be the way that I would do it is have that

consolidation after the fact and or you consolidate prior to and then move it over. Because what you're trying to do is reduce those taxable events. two different locations, it'd be much easier come tax time if you just had one tax form in one location. So you just transfer those funds over and then you start to make the sale based on where those funds are. But if you can't transfer those funds over because they don't have the same funds in that location, then you're going to have to do this prior to and then work on either just moving the cash over or consolidation. Those are the two options there that you have. So this is just something to kind of consider as you go through this process. And then you have to obviously go out there,

choose your three to six funds, have them available to you, figure out what you want to do there. Now, when you sell investments, what's going to happen is you could incur capital gains taxes. Now, if you've held these investments for longer than a year, then you're going to have long-term capital gains tax, which is a much lower tax rate than would be if you only own those investments for less than a year. If you own those investments less than you. You could pay up to high 30% tax rate, or if you had long-term capital gains tax, you're going to have 0%, 15% or 20%, and most people fall in the middle at that 15% range. You have to be making well above $400,000 to fall into the 20% range.

If you make less than, I think it's $42,000, then you'll fall into the 0% capital gains tax range. So it just kind of depends on where you are. Most people, like I said, are in that 15% range and that is taxed much less than your income. So it is still a favorable tax rate. It's just going to be taxed in a different way than your income is because you have that long-term capital gains. So that's one thing you got to consider. Now, that is only if you are in a

taxable brokerage account and you have to sell those funds to move them over, or if you're moving them into from taxable to taxable. So if you're selling those funds and moving them over, then that's what's going to happen there is you're going to have those taxable events. Now, if you're in something like a tax advantage account and you can transfer that over, then you wouldn't have to pay those taxes if you already paid the taxes. It just depends on what kind of situation that you were in. And then that's the best way to do it. So I like in-kind transfers. If you can do them, you can look these up in-kind transfers or the way to kind of move money around from a brokerage to brokerage.

It just depends if they offer those things. So you can do in-kind transfers for specific funds, but sometimes you just can't because the brokerage does not offer that same exact fund in the new location. So it's just very, very specific based on your situation. But in-kind transfers is what I would look at. Ask if they can do that in-kind transfer over to the next account. All right. So the next question is, should I keep throwing all my sales?

toward a down payment to the neglect of my retirement. My original plan was to buy early next year, but with interest rates, I may not be able to quite yet. I have about a 10% saved for down payment at this time. My goal was to max out my Roth IRA this year while still saving for a house, but I feel torn between saving for that and saving for retirement. And I'm wondering which to prioritize right now. All right, so this is a wonderful, wonderful question. And a lot of people are struggling with the same thing. You have multiple savings goals that you are trying to accomplish and it is so incredibly difficult to be able to save for both. A lot of people are in this boat.

So I'm going to talk through why and how we need to think about this. And this is kind of why we have the stairway to well to fall back on in a lot of situations. But this is a very different situation because buying a house depends on a bunch of different personal factors that come into play here. Now, one big thing to note, and I'm going to say this over and over and over again. We just had an episode on it when we talked about the total cost of ownership. But when it comes to total cost of ownership, you're going to understand very quickly. if you listen to that episode, that buying a house is not the number one greatest investment that you can make. In fact, investing for retirement, at least if you invest in the right

investments, can be a much greater investment decision than would be buying a house. A house is not something that is really necessary. Investing for retirement is necessary. That's the way I would think about it when it comes to personal finance. So when you come to multiple savings goals like this, I think you can accomplish both depending on how much you make, but you have to take into consideration, retirement always comes first in my eyes. Retirement is always number one because they do not make loans for retirement. And so you really want to be saving for retirement first. Then number two is saving for that down payment on a house. A house over time has returned about one to four percent to people who buy a house. Even when you see baby boomers who have made hundreds of thousands of dollars

on their house because they bought it 30, 40, 50 years ago, you have to factor in total cost of ownership and understand how those numbers work before you even consider that being an amazing decision where people are just thinking about that. So make sure you check out that episode if you haven't. But when it comes to this, I would always prioritize retirement first. So making sure I'm saving for retirement. I'm hitting my retirement goals. Then I'd be saving for a house. That is my personal priority. And that will always be my personal priority because I want that financial freedom in the future. My future self is going to thank me. Whereas a house may not be the number one most efficient financial decision. Now, if you have a family and you want to invest that money into your family,

that is your number one priority right now. Then maybe that would be a consideration where you would invest in the house because a house is a family investment. It is not a financial investment. And so you got to think about this as you go through this process and make sure you're running those total cost of ownership numbers. Now, also, you have 10% saved up already. If it's your first house, I have no issues with you putting less than 20% down on that first house. I did not put 20% down on my first house. And so this is why I say that. I give you grace on that because I think it's really, really important to understand that it is okay to put less than 10% on a house. Sure, you're going to have to run the numbers on PMI. You're going to have to make sure PMI still

factors into your total cost of ownership. And you're going to have to be paying that until you can get that off the books. But at the same time, there's nothing wrong with that. If you have two goals in place and your monthly payments are still less than 30% of your income, you're still hitting your retirement goals. There's nothing wrong with putting less than that. Now, I know costs of houses are rising right now. And so that may be one factor that is causing you to hesitate, only putting 10% down. You want to have that larger down payment to make sure that you're below that 30%. That could be one consideration. But as you think through this, that is how we want to make sure that we are staying within the parameters of both options. We want to make sure that we are prioritizing

retirement so that we can actually retire. And then we want to make sure that we have our savings goals below those retirement goals. That is the number one thing. Unless you want to work for a longer period of time and you have that all figured out, then that is more power to you because this is why it becomes very personal in this situation. But I would always, for most people, prioritize retirement, then the down payment if you have not prioritized retirement. Now, if you're saving for retirement in other areas and you're just trying to max out that Roth, that would be another consideration where you want to see, hey, are those other investments allowing me to hit my goals and the Roth is just icing on top? And maybe I value buying the house more, then that

would be the other piece that I would really, really start to think about. But if you want a quick, snappy decision, retirement, and then buying the house is the order I would consider. All right. So the last question is, I am curious to know your opinion on when to stop increasing contributions to the employer sponsored 401K and to increase contributions to other accounts, such as the Roth IRA or a taxable brokerage account. I contribute well over the amount to get my employer's match, so I'm wondering if I should lower that and contribute more to the other accounts. Fantastic question. So with this question, one thing you want to consider is I would tell you to take a look at the stairway to wealth and look at which flight you are on when it comes to this.

But if you are in the employer's match flight, then what you want to make sure that you are doing is if you're getting that match, you want to take into consideration what your goals are. So for me, I like to go to the HSA or Roth IRA next once I get the employer match and max those out. Now, the consideration that you want to have is if your AGI is above 30%, then you want to maybe consider talking to your CPA and seeing, hey, do I need to consider doing a 401k before I do the Roth level or the HSA so that I can get that tax deduction now? If you're a really high income earner, that would be the consideration where I would really truly consider talking to my CPA to make sure that I have that buttoned up before I do this. So if you're really high earner, make sure you check that first.

And then I would consider the Roth level. I would get the match. And then I would consider this. This is my order that I like is I would get the employer match. Then I go to the Roth HSA level and you can do both. If you have a high deductible health plan, you can choose just the HSA or if you don't have a high deductible health plan, you can choose a Roth or you can do both. And then from there, I would go back to the 401K after I max those out.

And I just like this because I like tax-free growth and being able to pull my money out tax-free, which is why I like the Roth level for most situations specifically. And even in my situation now, I still love the Roth for that reason. I like to have that back end. I can pull this money out. I'm not going to get taxed on this money again. And so I love it for that reason alone. Now, for you, maybe you like the 401K more.

You like the idea of not paying taxes now, letting your money grow, and then paying taxes way on down the line. There is nothing wrong with going that route alone. But for me, I like to get the match, get the match up to the minimum, whatever that minimum is, I'll get that match, then I move over to the Roth, then I go back to the 401K after that. So that is my consideration how I set that up. And if you want to diversify your tax

buckets, then you make sure that you bring in the taxable because if you're trying to retire early, the taxable brokerage account should be a part of your strategy when you have these different taxable buckets that you have available to you in retirement. So you got to make sure that you are considering all three of those. But that's the order I like. I like match, Roth, 401k, and then make sure that you consider that taxable bucket as well. If that that's a lot of that. that's something you want to make sure that you have. So that is how I would think about this, and that is the order I would think about that. Now, a CPA is a great reference. If you don't have one, you know, getting an accountant on your side to do your taxes every year and advise you on

some tax situations like this is really, really helpful for a lot of people. So they can really save you thousands of dollars a year on taxes. So that is a great option and making sure you advise with them as well on your personal situation is going to be really, really powerful. So listen, hope you guys enjoyed this episode of Money Q&A. If you guys have any questions, make sure that you reach out to us. You can send me an email if you're on the newsletter. And if you haven't been on the newsletter, you can go check that out, linked up down below in the show notes.

And beyond that, you can send a question on social media as well at Master Money Co. Thank you guys so much for investing in yourself because that's exactly what you're doing when you listen to this podcast. I truly appreciate each and every single one of you. And we will see you on the next episode. Frozen lasagna, medium power, 15 minutes. Sounds like, Ojo time. Let's play.

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