The Personal Finance Podcast - Should You Max Out Your Roth IRA or HSA? (Money Q&A)

Episode Date: May 1, 2023

In this episode of the Personal Finance Podcast, we're gonna answer the question, should you max out your Roth IRA or your HSA? 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. 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/ Thanks to Ka’Chava For Sponsoring the show! Go to kachava.com/pfp and get 10% off on your first order.  Shopify: Shopify makes it so easy to sell. Sign up for a one-dollar-per-month trial period at  shopify.com/pfp 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. Hello Fresh: Check out Hello Fresh www.hellofresh.com/pfp50 and use promo code PFP50 for 50% off your first order and free shipping! Delete Me: Use Promo Code PFP20 for 20% off!  Links Mentioned in This Episode:  The Stairway to Wealth (Where to Put Your Money In Order!) The Stairway to Wealth 2.0 (The Order You Should Put Your Money in!) The Back Door Roth IRA (How High Earners Can Get Money Into a Roth IRA!)  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. On this episode of the Personal Finance Podcast, we're going to answer the question, should you max out your Roth IRA or your HSA? And welcome to the personal finance podcast. I'm your host, Andrew, founder of mastermoney.com. And today on the Personal Finance podcast, we're going to be talking about should you max out your Roth IRA or your HSA. If you guys have any questions, make sure you hit us up on Instagram or Twitter at Master Money Co. and follow us on Spotify, Apple Podcasts, or whatever podcast player, you are listening to this podcast on right now.

And if you want to help out the show, leave a five-star rating and review on Apple Podcasts or Spotify. I cannot thank you guys enough for leaving those ratings and reviews. They truly mean the world to me. Now, today, we're going to go through a money Q&A. We have three great questions for you today.

The first one is going to be, do you recommend maxing out a Roth IRA before the HSA? And in addition to that question, they also ask how we manage receiving, inside of an HSA. Then number two, your boy is going to get on his soapbox and give you a rant because we're going to be talking about why whole life insurance is maybe the worst financial scam that is out there.

And I'm going to go through all of my thoughts on whole life insurance. If you have whole life insurance, I'm going to tell you what I would do in your situation if I had a policy. And in addition, we're going to go through all the reasons why whole life does not make sense. And the number three is we're going to talk about your employee stock purchase plans. And if you don't know what an employee stock purchase plan, I'm going to go through what that is, how you can get these discounted rates at your workplace so that you can get some of that

free money and then how are you going to plan out that free money if you don't believe in the company that you're working for. So we're going to talk about those three questions, how you should actually allocate those in the stairway to wealth. And in addition, we are going to give you some extra little pro tips as well. So so excited to share this episode with you. Without further ado, let's get into it. All right. So this question that we got in is about whole life policies. And it's asking, I've heard you talk about Whole Life policies in the past and how much you hate them. Can you talk about why you hate them and the reasoning behind why they are so bad? So Whole Life Policies are one of my least favorite products that are out there. In addition to,

there's a bunch of branches like Infinite Banking that has come out, IULs, all these different things. I think this is one of the worst industries when it comes to finance. And if you go on TikTok or you go on Instagram, you're going to be seeing all of these people pushing these products. Now, Whole Life is one that is one of the worst products that are out there that I would tell every single person, if you can avoid whole life. And I'm going to explain exactly why here today, because whole life insurance is one that you truly, truly just want to stay away. So most companies who sell whole life, this is how it breaks down because here at the master money, here at the personal finance podcast, we like term life insurance. It's really inexpensive. And it's a way that you can

have life insurance for what it was intended for, which is to insure your life, for anything happens. So most companies in Whole Life break down like this. Per $100 that you put into your whole life policy, you can get the same amount of insurance for about $5 with term. That means that Whole Life is 20 times more expensive than term insurances. This is a major problem when it comes to saving up because you want to reduce those costs, especially on insurances. Nobody wants to overpay for insurances for the same amount of money that's going to cover you. So you got to make sure that you are reducing that cost. Term insurance is going to significantly reduce that cost.

So on the insurance side, term has a major factor. That's the winning factor. Now, here is where the Whole Life Insurance salesman try to sell you on Whole Life Insurance, something called cash buildup. Now, if you've never heard of cash buildup, it's a way where you're putting money in there and they're trying to claim that you're building up this savings account so that you can access this money in retirement.

And this is going to be an amazing thing that you can actually. in retirement. Here is why this is one of the worst things that you can do with your money when it comes to this. So let's use the same example. Every $100, $5 of that is going to go actually towards your insurance. So what happens with the rest of that $95? Do you get to save that up in your cash savings account? No. Here's what happens with that $95. Here's the first problem. The first three years of Whole Life Insurance policies means that the fees are front-loaded. So for the first three years, your cash buildup is $0 for the first three years because they're smart and they know a lot of people are not going to keep this whole life policy for a very long time.

And once they smarten up and realize that this whole life policy is basically a scam, then what they're doing here is that they have this money and they already have their fees front loaded on the policy. But don't worry, there's fees all the way through the lifespan of that policy. So for the first three years, your cash buildup or your savings account is the easy way to explain it is $0.00. Once you do start building out that cash buildup, here's the bigger issue. Issue number two is that the average rate of return nationally is 1.2%. Okay? 1.2%.

Let's be generous and just say it is 3%. Give it more than double what it actually is. If that's the case, you can get a higher rate of return in a government-backed T bill than you could on this whole life policy. So it has a terrible rate of return. Now for short-term stuff, you want to get 3% rate of return on your emergency fund. More power to you. long-term stuff, you want to get 7, 8, 9, 10% rate of return so that you can actually build

wealth. You can't build wealth unless you're saving a lot of money on a 3% rate of return. So you're getting a much lower return, much higher fees of the two problems. Problem number three comes into play when you look at this because it gets even worse. Say you're paying that extra $95 is going into your cash value bank account. But if you die, that money goes back to the insurance company. Your cash value buildup goes back to the insurance company. and all your beneficiaries get is the face value, which is the same exact face value that you would get with term life insurance.

This is a massive problem where you've put so much money into Whole Life Insurance and you're getting back almost nothing. They are keeping all of your money. To me, it's absolutely sickening. It's one of the things that you can hear it in my voice probably. One of the most frustrating things when it comes to finance because they are stealing money from people, in my opinion. I think this is one of the worst products of all time.

And if you want to get Whole Life Insurance, it is a great way. way to make sure a relative who is selling it to you is actually going to have a nice large boat that you can ride on later on in life because they're taking all of your money. So instead, what you need to do is look at things like term life insurance, for example. So term life insurance is very, very inexpensive. This is what we're talking about all the time. So term life insurance is one that you can have for a very low cost, $30, $40, $50 per month for a large policy. I'm seeing situations now where I've talked to a few people who are in retirement and they are still paying on their whole life policy, and their whole life policy is going to take their entire retirement

savings, and all they're going to have left is that whole life policy. That is how much it eats away into your wealth building ability. So you've got to make sure if you have a whole life policy, here's my suggestion. And if you've been paying one for a very long time, this is going to make you throw up. But my suggestion with a whole life policy and do what you want, this is not financial advice, but this is what I would do is I would exit the whole life policy. So when you exit a whole life policy, it's going to make you throw up to see how much money you've actually been contributing to that, but at the same time, it's not going to hurt you in the long run. And instead, you'll still get that cash benefit, meaning you'll still get that amount of money

that you built up on that 2% rate of return, whatever your rate of return was. You still get to keep that money at least. And then you can do one of two things. So first one is you can surrender the policy. And surrendering the policy is what most people are going to be able to do. Get rid of the policy. You still get that cash benefit. And the amount of money that you pay that you most likely be losing anyway, would they be redirected

into investments? And then the short term, you have term insurance. So before you cancel any policy, get your next insurance. If you're going to get term insurance, get that term insurance in place first, then you can cancel or surrender that policy. The second option is that you can do what is called a 1035 exchange to transfer your cash value to another policy like term insurance. Now, all policies do not allow you to do this, but some do. So you can look into a 1035 exchange, transfer that cash value so that you can move it over. Because surrendering a policy may result in little to no cash value and any gains may be subject to any.

income taxes. So if you're trying to reduce that income tax issue, if you're paying a ton of money, for example, in a whole life policy, and you don't want to get that income tax hit, then you can sometimes transfer that cash value into another policy also through a 1035 exchange, not to be confused with a 1031 exchange in real estate that we talk about all the time. 1035 exchange is for insurance products. So look into those two options. If you have a whole life policy, I personally would get rid of it. That is what I would do. That would be my prerogative. I would want to get rid of that policy because it is one of the biggest scams out there, in my opinion, and it's one that 99% of people shouldn't have. When should somebody have a whole life policy? The only time would be a situation, maybe,

where someone in your family has a disease or you have a disease and you can't get a specific policy. But even in those situations, term life insurance can still be transferred over to a whole life policy. So term life insurance still gives you more flexibility than a whole life policy does. term gives you flexibility and you know everything what we talk about here in personal finance is all about flexibility so you want to make sure that you are doing that now the only people who are going to get mad about this is the whole life policy salespeople because guess why they are the ones that make the money off of this so most people even certified financial planners they don't even sell whole life policies anymore nobody sells this stuff anymore because it's a product from the

1950s that only insurance salesman pedal so it's one of those things that you want to avoid as much as you possibly can. Do you recommend maxing out a Roth IRA before the HSA? Secondly, when you save receipts in an HSA, are you paying money out of pocket instead of inside of the HSA so that you can use the receipt for the future? So I'm going to answer the first part of the question first, and then we will get into how to actually utilize those receipts and those expenses out of pocket. So the first question is, do you recommend maxing out a Roth IRA before an HSA?

So if you look at the stairway to wealth, and if you don't know what the stairway to wealth, is it's the order that we talk about allocating your dollars when it comes to starting your personal finances. It's like a step-by-step guide to show you how to actually allocate your dollars. So on the stairway to wealth, we have the Roth IRA and the HSA at the same level. For a lot of people, though, I would seriously consider going with the HSA first. The reason for this is because of the triple tax benefits inside of the HSA. Now let me explain why I love the HSA, and this may make it more clear. I love the HSA because it has triple tax benefits, meaning the money that you put into the

HSA is tax free, the money grows tax free, and you can pull the money out tax free as long as you have a qualified medical expense. The IRS has a massive list of what is a qualified medical expense. Number two is because health care costs are going to rise over time. And so this is the biggest expense for a lot of folks who are in retirement age. When they look at their spending and their budget, health care costs are a massive cost because the order we get, we're going to need more health care. Number three is that you have flexibility with an HSA.

In fact, you have so much flexibility that once you turn age 65, your HSA basically turns into a traditional IRA. So it gives you that flexibility of the traditional IRA in addition to having the flexibility of the HSA if you decide to retire early. So there's two sides to that coin when it comes to flexibility. You know your boy loves flexibility when it comes to personal finance. I want you to have as much flexibility baked in. to your finances you possibly can, and the HSA is the thing that can do that.

So those are three reasons why I love the HSA. Now, there's a bunch of other pros to the HSA that you want to definitely consider, but these are the main pieces to consider as you think through this solution. Do I want that triple tax benefits? Am I going to have enough medical expenses throughout my lifetime? And do I want to retire early? If you want to retire early, you can either do a Roth conversion ladder inside of the Roth IRA, which we have an episode on, or you can utilize the HSA and the qualified medical expenses

you've used thus far and use those as part of your retirement supplemental plan as you go through this. Now, so this shows that it's a very, very powerful account. A lot of very smart people in the financial space are contributing to an HSA before their Roth for this reason, the triple tax benefits. So if you are considering that, I would seriously, seriously consider this. And if you haven't opened an HSA yet and you're listening to this podcast, what's you doing? Now, one caveat, if you don't have an HSA open is because you don't have a high deductible health plan, you have to have a high deductible health plan. So it's only. for people who have that high deductible health plan,

but at least contributing some money to your HSA is very, very important. Now, the other side of this coin is you can max out that HSA, and I also love the Roth 401K. Now, why I love the Roth 401K is you can get more dollars into that Roth 401K, so it can really start to build wealth there as well. So one train that you can follow is you can max out your HSA, then go to the Roth 401K if you're a really high earner, max that bad boy out,

and then you have two really powerful accounts maxed out, two of the most powerful accounts that are retirement accounts, in my opinion, these are the top two. So you can have both those maxed out and really looking to have these tax benefits that are going to tremendously impact your wealth building ability over a long period of time. So really, my answer is, I would like you to do both. But if you can only do one, you can do partially in the HSA and then max out the Roth, or you can max out the HSA and partial in the Roth until you have enough income where then you can max out that Roth. It can be a Roth 401K or IRA. your choice, but I love the 401K just because you can get more dollars into there.

And a lot of employers will match your Roth 401K so you can get that going as well. So between the two, it really depends on your situation, but I would seriously, seriously consider the HSA for those triple tax benefits. Now, part two of that question is how do you manage your expenses with the HSA? So if you have a high deductible health plan, you open an HSA, here's what you don't want to do. You do not want to track your receipts where your HSA is. A lot of those companies have a place where you can track your receipt. they have cloud storage for you that's free inside of that HSA.

The problem is the reason why they do this is they don't want you to leave that provider. So if you have your receipts from your HSA saved within that provider, then it is not transferable if you leave your HSA from there. Maybe you want to transfer it over to Fidelity or Vanguard or wherever else, then you cannot do that inside of that HSA. So instead, I have a very different tracking system that I use in order to track my receipts and my totals. So I use Google Drive or Dropbox.

You can use either one to store my receipts and I just do them by date and what they are. And then yearly, I just make a new folder every single year and store those receipts in there. Then I also put them on a spreadsheet. Now, the spreadsheet is like the extra step that most people don't want to do because it's annoying having to fill out a spreadsheet every time you get a little receipt. But the reason why I do this is so that I know what the running total is for long-term expenses when it comes to the HSA. So we may release a copy of the spreadsheet that I made that I use. for my HSA so that you guys can have a copy of that as well. We'll see if we can do that here in the near future. But having that spreadsheet available to you is going to be a very powerful thing.

And that's why I track it in that spreadsheet. I take the extra step because you don't want to track it inside of your HSA provider if you think you're going to leave them. Now, two places to open your HSA that I like are Fidelity and Vanguard. Those are two of my favorite spots to open up an HSA with my HSA with my HITABETH plan. So you can check in with them. Make sure that you qualify for an HSA through them. You can go call them and talk to them if you want to and make sure that you have that set up. It is a really, really powerful account, really cool way to get that triple tax benefits. I mean, there's nothing like it to get those triple tax benefits. So really, really tax advantage way. And hopefully this is helpful in terms of how you are going to save your receipts and if you're

going to do the HSA of the Roth IRA. So we are going to do a third version of the stairway to wealth because I'm going to add some extra things like when you should buy a house. Should you go HSA or Roth, will add some extra caveats to the stairway to wealth coming up. And when we do that, we will talk about this a little more in that breakdown with the PDF also. So right now they're at the same level, but we will break it down even further based on your financial situation at that level so that you can make the most informed decision based on your financial situation. All right. I remember when I needed to hire someone fast, but finding the right person quickly felt impossible. And if you've ever been there, you know how stressful this can be. That's where Indeed comes in. When it comes to hiring,

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Habaniero, more like habanier, yes. Save the everyday with Amazon. The next one, when should I buy into my employee stock purchase plan at my company? My employer offers a 7% discount to my employer. stock purchase plan and where does this fall into the stairway to well. Okay. So the first thing I'm going to do is for those who don't know, and maybe you work at a company that has this and you don't even know that it exists. And if you don't know what an employee stock purchase plan is, a lot of people call these ESPs also. They are a way that you can buy the stock within your company at a certain

price and typically it is reduced from the actual stock price. Now the issue here is that you're buying an individual stocks and we know how we feel about individual stocks. But typically, what you can do is that you can buy this stock at a reduced price. And there's usually a limit to how much you can buy. It's based on a percentage of your salary and how much you want to contribute. So once you enroll in this, the way that it works is that it is directly withdrawn from your paycheck when payroll comes around. And sometimes it's pre-tax. Sometimes it's after-tax.

It depends on how it's set up. So when you set this up, you can ask your HR department if you're considering doing this. Then you buy the stock right out of your paycheck. So it just comes right out. is a classic example, just like your 401k, where you are saving off the top and then spending what is left over. It takes it right out automatically. So that part I like, the automatic deduction. Then what happens is you usually have a holding period, the amount of time that you have to hold onto your employee stock. So sometimes it could be zero holding period. Sometimes

it's a month. Sometimes it's three months. Sometimes it's six months. It just depends on what is laid out in the handbook at the place that you are employed at. Now, the stock purchase price is the main reason why somebody would want to do this, because you're getting a reduction of the stock purchase price. But here's the key to the stock purchase price. Sometimes it is the lowest price during the quarter, which is a really powerful thing. So sometimes if, say, for example, in this example, you get a 7% reduction on the employee stock price.

Well, sometimes the lowest point in that quarter is actually a 15% reduction, which is going to save you a ton more money. There's free money involved there in that time. time frame. So this is kind of where the gap comes into play. A 15% increase, all of a sudden, that becomes free money. So this is how we're going to evaluate this. Now, there are tax implications when this happens. So if you get an employee stock purchase plan, the tax implications at times for qualified plans means that in a lot of situation, the discount from the purchase price, meaning if you get at 15% discount, that 15% is actually taxable income. So you got to make sure that you

are accounting for that when you're running the numbers on this. Then if you leave the company, then you obviously can't continue to buy the stock anymore, but you own those shares that you typically have unless there's some weird caveat inside of your employee handbook, I would check that out. So if you want to participate or see if this is available in your company, you just want to contact your HR department, see if they have an employee stock purchase plan.

I'm going to show you how to consider if you actually even want to do this. So the key to this whole thing is how big of a reduction in the stock price do you get? If it's 2, 3%, then maybe it's not worth it. But if it's 5, 6, 7, 15%, anywhere in that range, then maybe you want to consider, it. Now, this is obviously buying individual stocks. We're advocates of buying index funds and ETFs. So you have to go through some of these steps and these considerations before you actually go through and buy something like this. So here's number one. If your company stock is likely

going to increase over time. So you work at the company, you know how the company is operating. You can kind of see the inner workings of that company. Are they doing things that you think is going to be beneficial for that company in the long run? Now, some people can get duped with their company because they're working so hard inside of their company. They think it's the best company in the world. And all the managers are really good at creating a team environment, which really the company doesn't have strong financials. So that's number two is I want you to make sure that you look at the company's financials.

If you work in that company's financial department, then you're going to understand this very well. If you don't work in the company's financial department, do you get access to financials if you don't and it's publicly traded, which it would be in this stock situation for a lot of people? If it is publicly traded, you can look at what is called a 10K and see the financials there to see if it's profitable. and you can see what analysts think about the stock and some of these different things also.

The third thing I consider, are you worried about any major downfalls of the company? So, for example, do you work at a high fashion company and you're worried about a recession coming up? Because fashion companies do not do well when recessions hit. Do you work at a company that owns a bunch of restaurants? Well, restaurants do not do well when a recession is coming. So are you worried about those windfalls? And then lastly, make sure your CEO is not on the phone all the time saying, everything's going to be okay, everything's going to be okay over and over.

and over again because that's another red flag that a lot of people missed. Now, here's some of the examples of companies that I would definitely hold. If you work at Google or Apple or Amazon or Johnson & Johnson or Home Depot or Klorox, any of those staple type companies that are going to be around for a very long period of time, those are definite wins to me. Those are ones that I would always be buying into the employee stock purchase plan. And then you can follow along on these next steps that we're going to talk about here on if you want to take advantage of at least the free money here, then this may be one that you can definitely do. So where would this fall in the stairway to wealth before we go through these steps?

This would fall into place with the free money portion if you're going to follow these next steps that we're going to talk about because you want to take advantage of free money always. So the employer match level and the ESPP level could go hand in hand depending on what the fees are and the structure of your ESP. So here is how I would handle it if you don't want to hold that individual stock. Number one is I would buy the employee stock purchase plan. I would buy into it and I would buy the amount of shares that I could afford. in the employee stock purchase plan

without contradicting some of the things like investing in your Roth IRA, some of those types of things. Then I would hold it for the required time. If there's zero required time, that's absolutely amazing for you in your situation because you're going to get this free money, you're going to get this free gap

without having to worry about the required holding time because anything could happen inside of that required holding time where if the stock tanks, then you're holding onto these shares. But if you're going through this cycle over and over and over again, it's not going to be that big of an impact. So you're going to hold it for that required holding time. Maybe it's 30 days.

then you're going to see where the share price is during that time frame. Then you can sell those shares and then redeploy those shares into index funds, ETFs, whatever taxable brokerage you want to do, or you can redeploy them in your 401K or IRA and then reduce that taxable rate by doing so. So that's the three-step system. Buy the ESP, hold it for that time frame and then sell it and put it into the actual assets you want to if you don't want to hold on that stock. If you want to hold on that stock, for example, if I worked for Apple, I'd be hold

on to that stock for a very long period of time. Why? because we are all addicted to phones. These things, if you're watching on YouTube, I'm holding up my phone right now. We are addicted to phones. And so that's something where I'm going to hold that stock for a very long period of time.

Now, if I work at Uncle Rico's restaurant company who owns 10 different restaurants, then I'm not holding that stock for as long of a period of time. Instead, I'm going to this ESPP process where I'm going to buy it. I'm going to hold it for the time frame. I have to hold it. I'm going to take that gap, that 15% increase,

and then I'm going to take that and go ahead and redeploy those funds into assets that I truly believe in, like index funds, ETFs, real estate, all those things. Just know the tax implications. Talk to your CPA, if you have not already about the tax implications on some of this stuff. But it's a great way to either capture that gap or buy shares of stocks at a discounted rate. So I think it's something, if you can get that free money and you can figure out how big that gap is, then it's definitely worthwhile looking

into because we always want to take advantage of free money here at Master Money in the Personal Finance Podcast. We definitely always want to be taking advantage of that. So that is a great option if you are looking through doing something like that. That is it for this episode of Money Q&A. If you guys have any questions, you want to send in your questions. Make sure you jump on the Master Money newsletter. So you can jump on that Master Money newsletter linked up down below in the show notes. And if you respond when we send out the Master Money newsletter, those questions will be prioritized.

I can promise you that. But in addition, you can also ask questions on Instagram. You can ask them on Twitter as well at Master MoneyCo. We want to be answering all of your questions and helping you solve your money problems. So this is our passion. This is what we want to do is teach as many of you how to build wealth as possible, but also bring as much value to you as possible. So make sure you send over those questions. We want to see your questions.

And if you want it on the show, if you want to have those questions on the show, whenever you send an email or you send a DM on Instagram or whatever else you do, make sure you just say, hey, we want to see if you can answer this on money Q&A because I will expand on it, as you can see for 10 minutes if we put it on money Q&A. So making sure that you send them over, letting us know that you want it on money Q&A is perfect. And we will go ahead and answer those questions for you, especially if it's a big money problem. There's a lot of you out there who have the same money problems. And we want to solve those problems with you so that you can learn how to get past that pain point and learn how to build wealth. So really excited to continue these money Q&As with you all. We have some amazing episodes coming up that are going to be teaching you a bunch of different things about generational wealth.

And in addition, we have some amazing guests coming up. So really excited for some of these future episodes that we have coming up. So if you're getting value out of this podcast, make sure to leave a five-star rating and review, Apple Podcast, Spotify, or whatever podcast player you're listening on right now. And please share this episode with a friend if you think that you are getting value and a friend can also get value out of this episode as well. Thank you guys again so much for listening to this podcast.

I truly appreciate each and every single one of you. And we will see you on the next episode.