The Personal Finance Podcast - Should I Pay Off Student Loans OR Start Investing NOW?! - Money Q&A

Episode Date: July 15, 2024

In this episode of the Personal Finance Podcast, we're going to do a Money Q&A about should I pay off student loans or start investing now?  Today we are going to answer these questions: Question 1: Should I Pay Off Student Loans OR Start Investing NOW? Question 2: Should I Use MY 401(k) To Buy A Business?! (Pros & Cons) Question 3: Can I Use an FSA and HSA on Different Health Plans?  How Andrew Can Help You:  Don't let another year pass by without making significant strides toward your dreams. "Master Your Money Goals" is your pathway to a future where your aspirations are not just wishes but realities. Enroll now and make this year count! 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 Monarch Money: Get an extended 30 day free trial at monarchmoney/pfp Thanks to Fundrise for Sponsoring the show! Invest in real estate going to fundrise.com/pfp Indeed: Start hiring NOW with a SEVENTY-FIVE DOLLAR SPONSORED JOB CREDIT to upgrade your job post at Indeed.com/personalfinance Thanks to Policy Genius for Sponsoring the show! Go to policygenius.com to get your free life insurance quote. 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/ Delete Me: Use Promo Code PFP for 20% off!   Links Mentioned in This Episode:  Everything you Need to Know About Your Student Loans (and How to Prepare to Start Paying Them Off!) 7 Ways to Pay Down Your Student Loans Faster The $5 Billion Roth IRA and How You Can Use the Same Strategy (Self-Directed IRA) A Masterclass on Self-Directed IRAs with Kirk Chisholm 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

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Find your advisor at IG Private Wealth.com. Should I pay off student loans or start investing now? Welcome to this money Q&A. Welcome to the personal finance podcast. I'm your host, Andrew founder of mastermoney.com. And today on the personal finance podcast, we are going to be answering a bunch of your questions. If you guys have any questions, make sure you join the Mastermoney newsletter by going to mastermoney.com slash newsletter. And you can respond to any of those issues that we have coming out every single week, and I'll be able to help you out and respond to those and or you could get your question on the show. And don't forget to follow us on Spotify, Apple Podcasts, or

your favorite podcast player, and consider leaving a five-star rating and review if you are getting value out of this show. Can I thank you guys enough for following, subscribing, and leaving those five-star ratings and reviews, that helps us get this message out to everyone out there. And you can also watch us on YouTube if you go to the Andergen-Cola YouTube channel, which is just just my name, you'll be able to find us on YouTube as well. Now, today, we are diving into three big questions from you guys that I really am excited to answer. So the first question is going to be talking through, should I pay off student loans or should I start investing now when there's some very specific requirements on some of the SAVE program that has just come out that we're going to

be talking through and how that's going to help you in figuring out what you need to do. The second question is should I use my 401k to buy a franchise or a business and what are the pros and cons there? We're going to talk through that option and should you do that? And then lastly, we have a question on can I use an FSA and HSA if my spouse and I are on different health plans. And so because of that, we're going to talk through and dive into that as well because it's a little more complicated than it seems like it's on the surface. So really pumped about this episode, really excited to dive into it. If you guys have questions, again, make sure you join the Mastermind Newsletter. We can answer your questions as well and possibly get them on the show.

So without further ado, let's get into it. I've been listening to your show for a while now, and I appreciate what you do. You've helped me become so much more financially prepared for life. Well, thank you so much for the kind words. I've got a question about student loans. Since your previous episode is talking about them, the current administration has put out a new income-driven plan called the save plan. The gist is that as long as you take your monthly payment, the government will subsidize any remaining accrued interest so that the principal loan balance doesn't grow. Like many other IDR plans, the remaining balance will be forgiven and income taxed in 20 years.

So in my case, I'm 25, just graduated from physical therapy school, and my monthly payment will be $0 through next year, possibly two, due to me and being in school full time, in 23 and making no money. And going into the rest of 2024 and 25, I'll have a full-time job and income, so I'm getting ready to embark on the beginning of my financial journey. My student loan balance is six figures high and has an interest rate of 5.875%. And when I file income taxes for 2025, my monthly payment then will hover around $500 per month. And remember, my loan balance will not increase thanks to the government subsidy on any remaining interest beyond that monthly payment. I have no other outstanding debt other than student loans, and I have a nice renting situation set up for myself right now. Given all this, I want to hear your thoughts on how you would think through the stairway to

wealth, and if there would be any changes there. I'm seeing two situations right now. Either I be aggressive or try to pay off the loans as fast as I can, which may hinder my ability to my savings goals. Or I can take advantage of the save plan benefits and begin to build wealth now, letting compound interest do its best work while I am still in my 20s. Then when the time comes for the big income tax hit in 25 years, I would be prepared for it. I guess it really comes down to the opportunity cost of how much money I would be paying in monthly payments over the course of 25 years, plus

the income tax hit versus how much wealth I could build with investing my dollars instead of being aggressive. All right. So this is absolutely a fantastic question. And one of my favorite things about this question is you explained it very, very well in your question how this works. I love that you already know how this works. You did your research. Then you came to me and kind of said, hey, here's my scenario. What would you do in this situation? I'm already well educated here, but what would you do in this exact situation? So I'm actually going to go one step further for people listening because a lot of times I want to make sure we have all the facts for everybody and I'm going to try to simplify this as much as possible if you're not familiar with the save plan.

Because the safe plan is actually a great program for a lot of people. And the safe plan actually says that every American will save money with the save plan if they actually utilize it. So I'm going to actually go through the save plan. I'll talk through the steps on how you can utilize the save plan. Then I'm going to tell you exactly what I would do in your situation. All right. So the save plan stands for saving on valuable education. And it is a type of income driven repayment plan for student loans. So this helps you make your monthly loan payments more affordable based on your income and family size. So zero dollar payments are possible, which is what we're talking about here, because for the next two years, he is going to be a student for the next

couple of years. So you can actually have zero dollar payments possible if your income is low enough. Now, the save plan lowers payments for almost all borrowers compared to the IDR plans because payments are based on a smaller portion of your adjusted gross income. Now, as a side note, if you don't remember what adjusted gross income is, this is your total income for the year after subtracting certain adjustments or deductions, things like that. Now, you may be saying to yourself, well, what adjustments or deductions are there? These are things like student loan interest, retirement contributions, educator expenses, and essentially AGI is the gross total income from your wages, investments, and other sources minus specific deductions allowed by the IRS. So that's

the most simple way to put it when you're talking about your adjusted gross income. Now, back to the SAVE plan. The SAVE plan also has an interest benefit. So if you make your full monthly payment, but it is not enough to cover the accrued monthly interest. The government is going to cover the rest of the interest that accrued that month. This means that the safe plan prevents your balance from growing due to unpaid interest. Now, this isn't a very, very powerful thing, because we want to make sure that we are hedging against unpaid interest, especially when it comes to debt. This is why high interest debt is so important to pay down because compound interest is actually working against you instead of for you. This helps.

that situation because your balance will not grow because of unpaid interest. The safe plan also gives borrowers who originally borrowed $12,000 or less forgiveness after as few as 10 years. So this is another great benefit for those who borrowed less than $12,000, which is not the situation. And then after 20 to 25 years of payments, depending on your loan type and when you borrowed, any remaining loan balance will be forgiven. However, you may have to pay income tax on the forgiven amount,

is going to be very, very likely. You are definitely going to have to pay income tax on the forgiven amount. So, first of all, would I apply for the SAVE program? Absolutely. Anybody who qualifies and can apply for the SAVE program, I would absolutely do that. So how do you do it? First, you go to and apply through the SAVE plan through your loan servicer. Step two is your monthly payment is calculated based on your income and family size. So it depends on what your income is, depending on your family size. Your monthly payment will then be calculated. then you make your monthly payments, which can be as low as $0 if your income is very low. And the government will cover any unpaid interest each month so your loan balance doesn't increase.

So they're using this monthly payment formula. The government is going to subsidize on those interest payments so your loan balance doesn't increase and you're making those payments forever. See, what happens to a lot of people is they do not pay down their interest. And when you don't pay down your interest, your loan balance just grows. You've maybe talked to someone who is in their 40s or 50s now where their loan balance might even be increasing instead of going down, even though they're making all these payments, and they're exhausted from making all these payments. They're working so incredibly hard, and I feel

you if you're doing that. But the reason for that is because of this interest, and this interest is causing it to grow over time, which if that's happening to you, it's really important to get rid of this debt, otherwise it's just going to continue to grow over time. It's compounding against you. And so what you need to be doing is getting rid of that, but this is going to help folks in that situation. Now, after making payments for the required 25 years, any remaining balance is forgiven, but you're going to owe taxes on that forgiven amount. It's not going to be you may, I think you absolutely will owe taxes on that 25 years. So you laid out two options here in this specific scenario.

Option one, you can aggressively pay down student loans. So what are the pros of aggressively paying down student loans? A, you can reduce some of those interest costs by paying your loans faster. You're going to have debt freedom if debt really, really bothers you, and it's something that really stresses you out. And you can have that peace of mind sooner. And that's what money's there to do. If debt really stresses you out,

it's to give you that piece of mind. But it doesn't sound like from your question that you're really stressed out about this debt. And then lastly, it also will give you a credit score improvement. Obviously, paying down that debt can improve your credit score, which can help you in a number of different scenarios, but also you can improve your credit score and number of other different ways.

And so that is another option that is there. Now, the cons to this, and this is the biggest con I see overall, is that the loss of opportunity costs could be there. Now, we got to factor in opportunity costs when it comes to paying down these student loans. Since you are so young, that opportunity cost is a massive, massive benefit to you because every dollar you invest now

is so incredibly valuable. And so the opportunity cost is a very powerful thing that we need to make sure that we have. Also, it may cause you, if you pay this down really, really quickly, to sacrifice other savings goals that you may have in hand. And so you don't really want to sacrifice those other savings goals early on,

especially at this interest rate that we're looking at here. So that is another con that could happen in place where maybe you have an emergency fund goal. You want to set up your financial foundation if you don't have it already yet. And so you want to pay off any other debts. And so you're thinking through this and you're trying to decide exactly what to do. Now, let's look at option two because that's option one and the pros and cons of it. Now let's look at option two in the pros and cons of utilizing the save,

plan and benefits to build wealth. First, pros, you get a government subsidy. So the government is going to subsidize any remaining accrued interest, preventing your principle from growing as long as you make the required payments. Number two is you get to invest early, which allows compound interest to work in your favor. And then number three is you get flexibility. So you can build a robust emergency fund, for example, with the extra funds, you can contribute to retirement funds, you can invest in other opportunities because you have this flexibility built in because you're not taking all of your dollars and trying to pay down this debt as fast as you possibly can. Now, the cons are the accumulated debt and the potential interest. So despite the subsidy,

you'll still be paying interest on your principal balance, you know, the total interest on your principal balance, but it likely could be forgiven in the long run. And then obviously you have accumulated debt on your net worth statement. And so if your net worth is something that you value a lot like I do, that is something also that you just want to kind of consider as you think through this. Now, here's exactly what I would do in your situation. Okay. So I would take advantage of the save plan. And what I would do is I would build my financial foundation first. And so I would go out and I would start to build out that emergency fund. I would have that buffer. I would start to invest money because your investment dollars are so incredibly valuable right now. And if you don't need a

massive financial foundation, if you have parents involved who might be helping support you while you're in college or if you have other loans, depends on what's going on there. But over the course in the next two years, it sounds like you're not going to have much of an income. And so because of that, what I would consider doing is starting to build out that financial foundation if you have money coming in and investing those dollars and allowing that money to start to grow. Putting money in something like a Roth IRA, for example, is going to be a huge, huge benefit to you in the long run because you can allow those dollars to grow. You can't get those years back.

And so for me, in this situation, I would absolutely apply for the SAVE program. I would take advantage of the SAVE program and I would build that financial foundation. Now, what I would plan on doing is over time, I would start to really take my extra dollars towards building wealth. I'd make the payments towards a safe program. Then I would take my extra dollars towards wealth building activity. So you know the stairway to wealth has a multiple wealth building activities on it. And so I would go in that order, go through those wealth building activities. And then from there, if my income really started to increase, then I would pay down this debt later on down the line where the stairway to wealth talks about that. So you have

things like wealth accelerators ahead of that and maybe investing in real estate. But this is still considered under 6%, even though it's on the line there, but it's under 6%. So you can still consider this as something where you make those save payments. And then from there, moving on down the line, then you can go ahead and start to pay it off if you start to make a lot more money later on in life. And I have a feeling based on the way that you asked this question, that you will be making a lot more money because it seems like you really know what's going on with your money and you're interested in this, which the more interested you are in your money, a lot of times people start to earn more money over time as well. So this is honestly a fantastic question. And so I would

follow the steps on the stairway to wealth. They would not be out of order. And instead, I would consider this as a lower interest loan. And then from that time on, I would go ahead and pay off the loan once you start to make a lot more money. If you have a lot of extra cash on hand later on in the line. If not, and you want to take advantage of that forgiveness, you absolutely can. just plan out having cash on hand for the taxes, things like that, if you get forgiveness later on the line. Now, I don't think forgiveness is completely guaranteed. I got to go read the language on that. But I would read the fine print on that to make sure that forgiveness is guaranteed if you're going to take that route. Because I think that's really, really important

as well to ensure, you know, we have a bulletproof plan here. So that's exactly what I would do. So a plan like this would be maybe year one and two, you start investing a little bit and build out that emergency fund. So you start to maybe start contributing to that emergency fund, building it out slowly over time. And during that time, your student loan payment is likely going to be around $0. So you can focus on saving and investing in year one and two. And then year three and beyond, as your income increases, you can continue to contribute to retirement accounts and make those regular investments, then allocate any extra funds towards

your wealth building activities. And then if you make even more money in years three and beyond, then I would start to contribute more to that save program. And then just do regular reviews. Review this over time and kind of see where you land. this is six figure debt. It may take some time, but I would definitely take advantage of this so it doesn't compound against you. And then going forward, hope that you can get some of this forgiven later on down the line because that'd be absolutely fantastic for your personal

financial situation and so that you can take advantage of this. So listen, absolutely amazing questions here. I love that how you were thinking about this. And I think the safe plan is honestly a great little program that I think most people listening should take advantage of. and if you have not heard of this, please go look into it, take advantage of it, and it is something that definitely can help a lot of people. I recently... I remember when I needed to hire someone fast, but finding the right person quickly felt impossible.

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And if you haven't heard, we actually had two episodes kind of talking through things like self-directed IRAs, which are similar to this topic. So if you're interested in this type of topic, self-directed IRAs, we had one where we called it the $5 billion IRA. And then we had another one about self-directed IRAs as well called the self-directed IRA masterclass where we talked through this a little bit. But to do something like this based on what you're looking at here, I'm going to go through the pros and cons of this completely in this strategy and what I actually think about this, but a self-directed IRA would not be the best option if you're looking to buy a business or a franchise. And the reason for this is because if you want to know how a self-directed IRA works, you have to open a self-directed IRA with a custodian that allows for alternative investments such as real estate, private businesses, or special

metals, things like that. You can buy gold and all that kind of stuff in there. And then what you do is you fund the self-directed IRA. And then you start to make your investments. And you can use the funds with a self-directed IRA to invest in a business. However, you cannot directly invest in a business that you own or intend to operate due to IRS prohibited transaction rules. So if you plan on owning or operating that business, then you cannot use a self-directed IRA. Instead, you have to go a different route if you want to use your 401K to buy a franchise. And so there's some pros and cons to it.

But it's called Robs or ROBS. And it stands for rollover for business startups. And it is a way that you can use a retirement funds to start or buy a business without paying early penalty or withdrawal taxes. And here's a simple breakdown of how this works. So the way that Robb works is you have to, A, establish a C corporation. So you must form a C corporation for your business. And it cannot be used with any other business structures like an LLC or an S corp.

It has to be a C corp. Okay. The number two is you have to create a new retirement plan. So you have to set up a new retirement plan, typically a 401K within that C-C. So it becomes very complicated pretty quickly here. Then you have to roll over the funds. So you're going to have to roll over your funds from your existing retirement account, like your 401k or IRA, into the new 401k plan established by your C corp.

Then you can go and you can purchase stock and use the funds in the new 401K to purchase stock in your C corp. And then lastly, you can use those funds in the C corp. And the C corp now has cash from the stock purchase, which can be used to start or buy your business. And so it is somewhat of a workaround to get. your dollars from your 401k into buying a business and or utilizing it for a franchise. Now, if you're buying a franchise, a lot of times the franchisee will help you with this

process if you're interested in something like that. But I'm going to go through the pros and cons of doing something like this. Is this even an opportunity that I would consider? Is this something that I would do? And I think personally, I'm going to go through the pros of this first and then I'll tell you kind of what I would do. So the pros are access to funds, meaning that you know, if you have a 401k available that is not part of your major retirement plan, meaning it is not really a part of your retirement plan at all. Maybe you have investment properties. Maybe you're accelerating your Roth IRA.

You're more pro to your taxable brokerage account. And you're realizing you got this 401K sitting here and you don't really need these funds specifically for what you're planning on doing in retirement. And your retirement plan is a solid plan that is something that pretty much is already established. Then there's nothing wrong with accessing those funds to utilize them in this way, especially if it's before 59.5. Two is you can also use these funds for something that is a wealth-building activity without actually taking the penalty.

So there is a little tax advantage there without paying those taxes or taking the penalty early. You can avoid both of those things by using the rollover for business startups or robs. So that is another advantage. There's the advantage of business ownership. Obviously, business ownership is a great thing, but it also increases risk. And so it also allows you to have income diversification. if you're looking for more of that going forward.

Now, I think, though, if this is your only retirement plan, say your 401K and your Roth IRA or your two plans for retirement and you are not even close to retirement yet and you're using your 401K funds for something like this, I think that increases your risk significantly because the success of a franchise depends on a bunch of different market factors, including location, competition, all of those different things. So that market risk to me is not worth risking your retirement. If your 401k is your retirement plan, which for a lot of Americans, it is. In fact, Ramsey Solutions did a study and looked at 10,000 different millionaires and 80% of them

became millionaires in their 401k. So most Americans right now are looking at a 401k plan as a large portion of their retirement plan. So if it's a huge portion of your retirement plan, that's not a risk that I am willing to take whatsoever. So I would not even look at that because you'd be risking your retirement savings. Secondly, if you don't like complex setups, this is a very complex setup. this is a very complex setup. And if you don't like complex setups like this,

the process of setting this up is complex and there is very strict IRS rules and regulations. If you don't like paperwork and filling out forms and failure to comply, some of these can lead to a lot of different penalties. So you've got to be very stringent in how you handle the paperwork and how you handle this stuff.

You definitely have to have a CPA in your corner helping you with this kind of stuff and you probably want some other advisors as well in your corner. There are also ongoing costs. So there's costs associated with maintaining robs, including legal and admin fees. And so both of those are additional costs that you will incur by going this route. Now, some people, that's where they want to pull their funds from because they don't like where their 401k is sitting right now.

That's a different story. But you do have those ongoing costs going forward if that is something that bothers you. And then you have reduced retirement growth because you're using these funds into something else. So listen, businesses for most people, the majority of businesses out there fail within the first five years. And so you have to have some sort of business acumen to kind of understand what you're doing. I would never do this with my first business venture for sure. If this is your very first business venture utilizing your 401k funds that are for your retirement, I would absolutely never do this. There's almost zero scenario where I would do this because I'd rather just save up enough cash to buy a

business over the course the next maybe five years or so so that I can get out there and buy a business in a safer way while still continuing to contribute to my 401K. That way, I have a backup retirement plan if anything were to ever happen to me as I start to build out this business. A lot of franchises are willing to help you finance your business endeavor. There are things like SBA loans where they will actually loan you 90% of the value of a lot of these businesses. And so really there are so many options out there for people who want to start businesses or get into franchising. And using your 401K is not the option I would use. It's a, probably the most difficult. B, it's the one that is going to really just interrupt compound interest, especially

if you have those dollars invested. So you're losing out on the opportunity cost of that money growing over time. And in addition, you're using that money for something else that is much higher risk. Now, it could absolutely work out. And that is not to say it couldn't work out, but the percentage of certainty that it's going to work out is significantly lower than having that invested in something like a Target Day retirement fund or something like that. Now, nothing is absolutely certain. But the percentage of certainty is much high. than would be investing in a business endeavor based on statistics. And so that is another thing that I would look at as well. Now, I am all for taking risks. I am all for investing in businesses, but I like to save up the

cash to get my skin in the game and get that started first instead of using something like my 401K, which is just part of my retirement plan, and it is my fallback plan on everything else. If everything else in the world fails, but you continue to invest dollars into your 401k, your Roth IRA, and your HSA, if you continue to do that for a long period of time, overtime, you're still going to be able to retire. And so that is your safety net. That's how I see it. I see my retirement accounts as my big giant safety net in my big entrepreneurial journey, where I am looking to invest in as many businesses as I possibly can. I'm looking to grow these businesses over the course of the long term. But if they all fail, if they all crash and burn at the same time,

as long as I'm not taking on a ton of business debt, and as long as I am not putting my family in jeopardy with things like personal guarantees or anything else like that, then I am going to be able to weather that storm and still be able to retire and have that freedom because I've been contributing to retirement accounts that entire time. And so that is why I'm always very hesitant, A, to touch retirement accounts because it increases that retirement risk. B, it interrupts compound interest unnecessarily. And my favorite Charlie Munger quote, he talks about that. He says there's never a situation where I am interested in interrupting compound interest unnecessarily. But C, it also just takes away that backup plan.

It takes away the plan that allows you to still be able to have financial freedom, you know, by retirement age, if all else fails. So my preference, when it comes to franchises or building out of business, is if you're going to invest in a franchise, I would get the cash on hand, whatever the minimum down is that you need, I would start to save that up in cash over time and then be able to have that down. And then if you need to take on an SBA loan or if you need to do something else along those lines, you can take on that risk at that point in time. And that is more so the way that I would go. Now, if you're a person who is anti-debt completely, then that is a different equation that you're

going to have to run based on your own personal experiences and your own personal beliefs. But for me, I have no problem taking on a little business debt as long as it does not interfere with any of my personal financial situations and or as long as it does not put my family in danger or jeopardy. So those are some of them, a big thoughts on some of this stuff and how I would actually think about this. But, you know, tread lightly if you're going to do something like this and really weigh out those pros and cons. You want to make sure you have retirement security first. Financial independence always comes first when it comes to finances and, you know, treading away, chugging along always will be the best route for most people.

So this is a great question regarding the difference between an FSA and an AHA. And the question is, first, I have my own health plan through my employer, for which our two children are dependents. I use a dependent care FSA and a medical FSA and have used them to the max. My husband has an HSA through his employer and has been contributing for the past five years. Were we actually ineligible to use both those resources, HSA and FSA? We never spent on each other, but it sounds like that doesn't matter. So that's question one. Secondly, I am leaving my job to go into private practice and will not receive employer-sponsored health insurance.

We will jump on my husband's non-high deductible health plan and lots of questions have a rise about the HSA account. He was told that he would have to spend down his HSA money to be able to utilize the FSA on a new plan. I also don't know if he would need to take out some funds if he paid up front into the account. Not sure if he did. Lots of questions that seem more nuanced as I read more about them. online. Yeah, this is a great question. And this is something where it is really, really difficult to find good information on this because it is so specific to specific situations. So I'm going to kind of talk through this in a number of different ways. But for people who don't know what an

HSA is and an FSA is, an HSA stands for health savings accounts. And HSAs, I absolutely love. In fact, it might be my favorite retirement account. And because HSAs, you contribute money in, tax free, the money grows tax free, and you can pull the money out tax free as long as you pull it out with a qualified medical expense. Whereas FSAs or flexible spending accounts are accounts that you cannot grow over time. Instead, you put money into FSAs and you have to spend those dollars every single year. You've got to spend it all the way down to zero in an FSA, a flexible spending account. But an HSA, you can grow that money over time. You can invest those dollars and those accounts can grow very, very large. And the reason why I like HSAs is twofold. One is that retirement

is that you can use it in retirement and you can use it as a qualified medical expense. So if you plan on retiring early or you factor financial independence as a huge part of your retirement plan, then the HSA, boy, oh boy, is that a baller account that you should be opening it up? And then also, an HSA is very crucial for health care expenses as you age as well. Because if you can utilize an HSA, what happens here is that health care expenses are rising at a inflation rate of 7% every single year. That's the latest data that has come out. Seven percent a year is what you need to plan into medical costs when it comes to retirement. So if you're in your 20s right now, I mean, you're going to see a big compounding cost of health care over time unless something

changes in the future, which obviously our health care system is absolutely in disarray. And disarray here in the U.S. We get great care, but the financial side of it is absolutely terrible. But the caveat to that is that we got a plan for this because as you start to age, your health care costs are going to rise. And so an HSA can also help you do that with the power of investing. If it's inflating at 7% a year, at least we can keep up with that inflation by investing some dollars towards health care going forward. Now, let's talk about HSA eligibility, because eligibility for HSA and FSAs are the biggest factor when it comes to this. So to contribute to an HSA, first, you must be enrolled in a high deductible health plan and have no other disqualifying health coverage.

No other disqualifying health coverage being the key caveat there. And you mentioned your husband has an HSA and contributes to it. If he is enrolled in a high deductible health plan and meets some other eligibility criteria, he can contribute to an HSA. However, if you or your children are covered by a non-high deductible health plan through your employer and you use a medical FSA, it can potentially disqualify him from contributing to the HSA. And this is because having a medical FSA is considered other health coverage and can disqualify someone from HSA contributions.

So that is one big thing to note is that this could be canceling that out. Now, number two is the FSA eligibility. So flexible spinning accounts can be used by anyone enrolled in a health plan that offers them, regardless of whether it's a high deductible health plan or not. So FSAs, you can put money in there and utilize that. Secondly, the medical FSA is usually used for out-of-pocket health care expenses. And the dependent care FSA is used for eligible dependent care expenses. So they're used for two different things.

FSAs are not my favorite thing in the world, only because it causes issues with the HSA, and you've got to spend them down at the end of every single year. And they just do not have much flexibility at all. And as long as you and your children are covered by your employer's plan, you can use FSAs. However, the medical FSA should not be used for your husband's expenses if he wants to maintain HSA eligibility. Now, let's look at part two for a second. So part one here is, did you contribute to HSAs when you should not have?

I would probably look at your specific situation and think through if you or your children are not covered by this high deductible health plan and you're using that medical FSA, there is a high chance that it's disqualifying him. So that would be one piece that I would definitely look at is is that medical FSA. SSA disqualifying him from those contributions in the past. If so, then that's another conversation that you would have to have either with a CPA or someone to kind of help you through that process because that's not something you really want to do on your own.

And so that's kind of how I would think about that if you're looking at the HSA eligibility. It seems to me from just looking at what you've told me so far on your personal situation, there is a high chance that he was not eligible to contribute to that HSA even though you're on separate plans. Now, I think that's very confusing overall. I think if you're on separate plans, obviously my personal opinion is that you should be able to contribute. But also, based on the rules that I'm reading here, it looks like it may not be eligible there. So I would double check that for sure, just to make sure.

Now, part two of the question is transitioning to a non-high deductible health plan in HSA. So when you switch to your husband's non-high deductible health plan, he will no longer obviously be eligible to contribute to an HSA because you have to have a high deductible health plan to contribute. to contribute to an HSA. However, the existing funds in the HSA remain and can still be used for qualified medical expenses. So anything he's actually added in there can be used for qualified medical expenses. He does not need to spend down on the HSA funds before switching plans. So whoever said that, I would disagree with that completely.

He does not need to spend down the HSA funds. And the HSA funds can be saved and used for future qualified medical expenses, including in retirement. So spending that down is not something that he has to do. I think the person that's telling you that is getting it mixed up with an FSA, but I'm not completely sure, depending on what the conversation was. If there were any upfront contributions made to the HSA, those funds remain in the account and can be used for future expenses. And there's no need to withdraw these funds unless they're being used for qualified medical

expenses. And so that would be how I would think about the HSA. Now, if you're using an HSA and an FSA together, you've got to be a little bit careful here. So if you have a medical FSA and your husband has an HSA, you just got to make sure there's no overlap in coverage that would potentially disqualify him from contributing to that HSA once he switches to a non-high deductible health plan. And then once he switches to the non-high deductible health plan, he can no longer contribute to that HSA. But existing funds can still be used like we talked about earlier. So here's some considerations for the future that I would just think through. One is the tax benefits. So HSAs obviously offer that triple tax benefit, something that I absolutely love when it comes to that HSA. The account grows tax-free,

withdrawals for qualified medical expenses or tax free. We already talked about that at the top here. And those can be beneficial to use those HSA funds for qualified medical expenses whenever possible. And so you can utilize the HSA in retirement. And for the FSA, that helps you with just your tax savings. But the problem is those unused funds don't carry over year over year, which is the downside for me for FSAs is that part of it. There are some pros to FSAs, but really, I do not love them only because of the lack of flexibility. Now, if you're not using an HSA, then using an FSA is completely fine. So I would dive a little deeper there as well. Now, again, so kind of the checklist to wrap this all up is that based on what I'm looking at here,

it looks like your husband was likely ineligible to contribute to an HSA, but I would check with an accountant first based on your personal situation to take a look at that. And then transitioning to a non-high deductible health plan means that he can't contribute to an HSA whatsoever going forward. But existing funds will remain available. and then FSA still can be used, but you got to ensure there's no overlap with HSA rules if you ever switch back to a high deductible health plan.

So those are like the three checkpoints that I would look at and kind of go through that. Now, this is a great question. I absolutely love this. You said you had more questions. Feel free to send those over to me because I love these deeper dives too to make sure that we can kind of get into there.

But if you can, if you can stay with a high deductible health plan going forward, that's a great option for you. But if you have medical conditions, you know, in the household or anything else that you need to really, really take care of, obviously that doesn't make sense for everyone. So this is a, again, this is a fantastic question. Please reach out with any other questions that you may have. Listen, thank you guys so much for listening to this episode. This is a really fun episode to make. Cannot thank you guys enough.

Our entire goal is to bring you guys as much value as we possibly can. And so I cannot thank you guys enough for listening to the show and supporting the show, leaving your ratings and reviews, following the show and liking everything that we do. You guys, I appreciate you more than anything. And thank you so much for investing in yourself today because that's exactly what you're doing. when you listen to this podcast as you are investing in yourself. Listen, I truly believe every single person listening to this podcast can build wealth and it's just taking the next step, one step at a time, and I know that you can build wealth. Thank you so much and I will see you on the next episode. Frozen lasagna, medium power, 15 minutes. Sounds like Ojo time. Let's play.

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