The Personal Finance Podcast - The Super Retirement Account (HSA)

Episode Date: September 9, 2020

Episode 18: The Super Retirement Account (HSA) In this episode we cover:  What Is A Health Savings Account (HSA)?  HSA Contribution Limits The HSA Tracking System  How Much Can My Health Savings Account Grow? Other Massive HSA Benefits  RESOURCES: IRS Publication for what is qualified  M1 Finance Best Place to Invest  Personal Capital Free Wealth Management and Budget App  CIT BANK (Best Savings Account)  ** Some links may be an affiliate link and we earn a small commission at no extra cost to you. We only recommend products we truly believe in.  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 talk about the amazing benefits of the super retirement account, aka the health savings account. What's up, everybody? And welcome to the Personal Finance Podcast. I'm your host, Andrew, founder of dollar after dollar.com. And today on the podcast, we are going to be talking about the coolest retirement account of all.

And it is what I call the. super retirement account you're going to see exactly why and we're going to go through the process of exactly how to open one of these accounts what it is and how you can take advantage of all the tremendous benefits of and what is this account called what is this super retirement account well it's a health savings account and the amazing thing about the health savings account that we're going to get into is that it has triple tax benefits that means you save on taxes three different times within a health savings account and i'm going to explain exactly why that is. And this is a massive benefit. It has the pros of a Roth IRA and it has the pros of a

401k combined into one amazing account. And I'm going to show you exactly how to use the HSA. So let's get into the HSA benefit. So if you've never heard of an HSA or a health savings account, I'm going to lay it out for you. An HSA is simply a savings account. You could think of a savings account like at your bank. It's a simple bank account. And it's just like those normal accounts, except it has a bunch of extra benefit. And we're going to get into those benefits here shortly. But to qualify for an HSA, you must have a high deductible health plan. And the reason why they allow these tax benefits is because people who have a high deductible health plan will face a lot of high out-of-pocket costs with their health care. So the government provides tax incentives

to motivate people to actually save for their health expenses. And if you don't know, know what a high deductible health plan is, I'm going to break it down in simple way. So a deductible is just the amount of money that you have to pay out of your pocket before your insurance kicks in. So for example, if you have a $2,500 deductible health plan, you have to pay $2,500 out of pocket first before your insurance will pay the rest. And a lot of people get their deductible confused with their premium, and they're not the same thing. Your premium is not the same thing as your deductible. So understanding your premium is simple. It's just the amount you pay each month for your health insurance. And your premium inside a high deductible health plan is going to be

lower since the deductible is higher. A high deductible health plan may not be for every single person out there. It may not be for you and your family. You have to look at this situation individually. But it can make sense for a lot of people, especially a lot of young, healthy people. And if you have no idea or no earthly clue if you have a high deductible health plan, you can just talk directly to your HR department or if you're self-employed, you can talk to your insurance agent and they can walk you through and tell you if I have a high deductible health plan. But that's why I don't always recommend the HSA first to a lot of people, because it only is for people who have a high deductible health plan.

So it's not for everybody out there, but a lot of people can take advantages of the HSA with a high deductible health plan. And it has so many amazing benefits that we're going to get into right now that you're going to see exactly why this can be one of the most amazing retirement accounts you can ever use. Hey, real quick, if you're getting value out of this episode, leave a rating and review in Apple iTunes and share it with a friend. Now let's get back to the episode. Now, if you're trying to compare the HSA with other retirement accounts to see which one is the best for you, then I'm going to break each one down for you. So there's a big difference

between each account. And most retirement accounts have great tax benefits. That's the reason why I tell you to invest in your retirement accounts because the tax benefits are tremendous. Let's take the 401K or the traditional IRA, for example. In a 401k, the money that you put into your 401K are pre-tax contributions. That means you're not getting taxed on the money that you invest into your 401K. So, for example, if you make $100,000 a year and you contribute $10,000 to your 401K, the IRS sees it as you only made $90,000. So you get a tax break on $10,000 because you contribute it to your 401k or your IRA.

A. And that's not all because when you invest into these accounts, it grows tax-free. But what happens in your 401k is as you take your money out when you're retired, now you're going to get taxed on the money as you take it out. And these are great benefits because you're investing with tax-free money. So you're allowing your money to grow more than if you just invest in a normal brokerage account because there's no taxes taking out of the money that you're put into your 401k. The only downside is when you take your money out, you're going to get taxed on that money later on. And that's where the Roth IRA comes in. The Roth IRA is slightly different than the 401K. The Roth IRA is actually the opposite. So your tax on the money that you put into your Roth IRA. So it's simply the money that you take,

get on your paycheck. You can invest into your Roth IRA. But your money inside the Roth IRA grows tax free, which is a massive benefit. Because as your money's growing and as your money's compounding, there's no taxes being taken out. And when you take, you, take your money out, you don't have to pay taxes on that money. So say you have a million dollar Roth IRA and we have an episode called How to Become a Roth IRA Millionaire because this is a very systematic step that you can take towards building wealth. And so let's say you have a million dollar Roth IRA. Well, on that million dollars, you're not going to have to pay taxes when you take the money out. And that's a tremendous benefit to the Roth IRA because it can grow tax free and it's

manageable to max out over time. So I advise many people, to invest in their Roth IRA because it has this tremendous tax-free growth advantage. But here's the difference, because this is where the HSA or health savings account comes in. Because the HSA is the best of both worlds. And what a lot of people do is they contribute to their HSA as a savings account for their healthcare. That's what it was intended to do. That's what a lot of people do.

But I want you to think about it differently because the personal finance podcast is going to show you ways to take advantage of your money in ways that other people, are not teaching. And so it's fascinating what you can do with an HSA. And there's a lot of loopholes within the HSA that you're allowed to contribute to your HSA tax-free, okay? Then it grows tax-free and you can withdraw your money tax-free. This is a triple tax savings. Let me say that again. The HSA allows you to contribute to your account tax-free. It grows when invested tax-free so you can invest inside your HSA into index funds or target day funds or whatever you want. And you can withdraw the money. tax-free. But the best part is that you can take your money out whenever you want, as long as you have

a qualified medical expense. So with a Roth IRA or a 401k, you have to wait to your 59.5 to be able to take your money out. With an HSA, as long as you have a qualified medical expense, and I'll explain what that is later here, then you're going to be able to take your money out. And a qualified medical expense is just something, let's say, for example, that you go to the doctor, okay? And you have to pay a $200 dollar deductible for going to the doctor. Well, what you're going to do is you're going to save that receipt for later because the government doesn't have a deadline as to when you have to pay yourself back for a receipt. So you're saving your receipt for later on.

And what you're going to do is you're going to pay yourself $200 once you're retired and need the money. Because there's no rule as to when you need to pay yourself for medical expenses. So you can defer all your medical expenses to a later date, then reimburse yourself whenever you retire. The key here is to make sure that your medical expenses occurred. after you opened your HSA account. Because if not, then those expenses will not be eligible.

So obviously you're going to have a lot of receipts coming in that you need to track and you need to make sure you have a system in place. So I'm going to explain to you guys my HSA tracking system because if you're organized with this system, then the HSA is going to be fantastic for you. And if you know exactly where you are with your receipts, then it's going to be a much better experience for you. So let's get into my HSA tracking system.

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Visit vw.ca to learn more. SUVW, German engineered for all. Okay, so my HSA tracking system is extremely simple. And to put this system in a place, you just have to be somewhat organized and diligent on where you put your receipts. Keeping track of all your medical receipts over time so that you can reimburse yourself can be very tedious. That's why I keep digital copies. And that's what system I believe is best is digital copies. Because why would you want to keep paper copies and try to lug them around when you move or take them all over the place?

Or if something happens, say a natural disaster, God forbid, and inside your house, you're going to lose all those digital copies. And all your hard work is going to be removed. So you keep the digital copy so they're available wherever you go. So here's exactly what I do. So I receive my medical bill or receipt. I scan it into my computer with a mobile app. And nowadays, you can actually use your iPhone. And if you go to your Notes app and just hold down the Notes app,

there's going to be a scanner that actually pops up inside the Notes app. And a lot of Android devices do the same thing. You can get an app like I scanner. Or there's a million other Android apps that also have scanning capabilities. And all you do is you save that receipt inside a folder within a cloud service. So you can do something like OneDrive or Dropbox or the ICloud or any of those services allow you to be able to save files in the cloud. I specifically use OneDrive and I use Dropbox for work.

So there's two various aspects of that that I love using both of those systems. And they work just the same. But this allows you to have access to your receipts wherever you are. And you can just every time you go to the doctor's office, you can just scan it with your phone real quick as you're walking out of the doctor's office, put it in the folder and you're done. That's all you have to do. The last thing I do, this is an extra step, but I do this because it makes it easier over time is I create a spreadsheet and I just enter the total amount of each medical expense that I paid out of pocket as I put my receipt inside that folder. And I keep

the spreadsheet saved the same folder as all my receipts are in. That way I can just quick access, open it up, throw the number in, and I'm done. And the reason why you want to track this total is because you don't want to go through all the receipts later on and try to figure out how much in receipts you have because if you're contributing to your HSA a lot over time, you don't want to over contribute significantly and not know exactly where you are with your medical receipts because a healthy individual could truly fall behind. They could be contributing a lot of money to their HSA and not have enough medical receipts to reimburse themselves. And I'm going to show you how much an HSA can grow and it's sick very significant. So if you want to make sure that you're

on track and staying close to your total, then this is a good. system to put in place. But as you know, and as you get older, your medical expenses will go up. We all age. We all deteriorate over time. And so your medical expenses will definitely go up. So let's look at how much your HSA can grow over time. So how much can your HSA grow and how much can you contribute to your HSA? So for next year for the year 2021, your HSA contribution limits are $3,600 for someone who's an individual. And if you're on a family plan, then you can contribute $7,200 per year. So a family plan is if you have family members on your plan, like your husband, your wife, children, other dependents, then you're most likely going to qualify for the family plan

contribution. And the amazing thing about your HSA is that you can invest the money you contribute. So like most savings account, obviously you can't invest within your savings account, but with the HSA, it allows you to invest in there. So you can buy index funds. And let's say you max out your HSA for 30 years with the family plan. And you invest in index funds, say like the S&P 500 index fund, which I always talk about all the time, or you can talk about the total stock market index fund. And at the end of 30 years, if you invest in your HSA,

you're going to have a significant sum of money. In 15 years, if you max it out every single year, so if you max it out with the $7,200 family plan max out, at the end of 15 years, you're going to have $192,780. Now, that's with an 8% rate of return. So that's the average overtime of an index fund. In 25 years,

you're going to have $519,000. At the end of 30 years, now we all know how much compound interest starts to accelerate when you get to these numbers. When you get to year 25 to year 30, and we've talked about this a number of time, but listen to this. So if you contribute to your HSA and max it out for 30 straight years,

you're going to have $804,000 by the time you retire. Now, if you're an individual, let's look at the individual plan to see how much you would save. So if you contributed $3,600 a year for 30 years, you're also looking at a significant sum of money. In year 30, it comes out to $407,819. So for just contributing $3,600 a year, you're going to come out with $407,819,000, and that's tax-free money. Now, the biggest question comes into place, you're investing this amount of money and you have these large HSA accounts. Well, what if you have too much money in your HSA? What if you're a healthy individual, or you really don't think you're going to need that much money?

money in your HSA because that would take a lot of medical receipts to come up with $800,000 to be able to be in reimbursed so you get tax-free money. Well, don't fret here because if you're generally a healthy person, then having too much money in your HSA A is a good problem to have. And if you over-contribute to your HSA, it actually is just going to work just like a traditional IRA or your 401K. So the only difference is that your withdrawal year is going to move to 65 instead at a 59 and a half. So in a traditional IRA, which works similarly to a 401k, you can start taking your money out at age 59.5. Well, in HSA, if you have too much money in your HSA, then you can start taking the extra money out at age 65 without having to hit a penalty. But anything you have a

medical receipt for, you can start taking out right away. So let's say you have $300,000 in medical receipts over 30 years, and you have $500,000 in your HSA that doesn't have a matching medical receipts. And let's say you retire at 59. Well, you can start taking out that initial $300,000 and living off that money. And then once you turn to age 65, you can start taking out the rest of the money. And you're just going to have to have to pay taxes on the money that you take out, just like a normal traditional IRA. But you're not going to have to pay taxes on the growth. So the money is going to grow tax-free, and then you just pay income tax when you take the money out of your HSA. So really, your HSA is almost exactly the same as an IRA, except you get the

additional benefit of not paying any taxes on any money that you have reimbursement expenses for. And this is the massive benefit of the HSA. This is where the massive benefits come into play, because you have a backup plan if it doesn't work out. There's always a backup plan, and it's just as good as your other retirement accounts. And there's so many benefits to the HSA, and there's so many ways to use it, and it has so much flexibility that it's going to be a great benefit. for you if you qualify for an HSA. Now let me get into some other massive HSA benefits. So before we wrap this episode up, I wanted to get into the other massive HSA benefits that are available to you. And the first one is a lot of companies now are offering employer matches

for your HSA. And if you've listened to the 401k episode, you know I'm a huge fan of your employer match. And I think it's the first thing that you should invest your money in to be able to take advantage of 100% return on your money. So if you don't know what an employer match is, it's when your employer agrees to actually put in money to match the same amount that you've invested up to a certain point. So an example would be your employer would say, hey, I'll put in 3% of your paycheck, as long as you also put in 3% of your paycheck into your HSA. And this employer match allows you to be able to reap the benefits of 100% return on your money. So you always want to get your employer match because guess why? It's free money. I like

free money. I don't know if you like free money, but I love free money. So you always want to make sure that you get that, whether it's in your 401k or if it's offered in your HSA. And it's very common in a 401k. It's less common in HSA, but I'm starting to see it spread more and more now. The second massive HSA benefit is if you contribute through your employer, then you're going to save another 7.5% because you're not going to have to pay FICA taxes, and that specific taxes like your Social Security taxes or your Medicare taxes that you have to pay out of your paycheck, you're going to save on that as well

because the money is going to be contributed before those taxes. So you're going to save on that money. So you're going to save an additional 7.5% just by doing that, contributing through your employer. So if you're trying to weigh the options between your employer or just getting an HSA on the side, I would opt towards your employer, especially if it's a match.

But the second reason is because you can contribute through payroll deduction. So those two options make your employer a better option if they have good investment options. Now, if, say, for example, there's no index funds and you're really a big index fund investor, then potentially you want to look at other options. But at the same time, if your employer's going to match it, I mean, you're going to get significant benefits from that match alone. And so you just have to weigh out the options for each side. The third massive benefit is that you can invest the money in your HSA. This is huge that you can invest the money in your HSA because you're going to reap the benefits of compound interest. And as we all know, compound

interest is the biggest factor in building wealth. It's the biggest way to grow your money. And the fact that you can grow your money tax-free and have the benefits of compound interest is mind-blowing because you're putting a small sum of money into the account and you can watch it grow. You're almost growing to a million dollars over 30 years just by putting in $7,000 every single year. And this is where compound interest truly comes into play. You know, you can see the magic of compound interest. And it's massive for your bottom line. And if it's tax-free money, you're pulling out a million dollars tax-free. And one of the biggest things to watch as you're investing in your HSA is to make sure the funds that are inside your HSA through your

employer don't have high fees or high costs because these high fees can eat away at your profits. So you just want to watch that specifically in an HSA because some actively managed funds can have high fees. So you just want to make sure you avoid those. And lastly, if you want to know what qualifies as an HSA medical expense via the IRS, your boy dug into the publication. He dug into the IRS publication so you guys don't have to have a snooze fest and have to read through the publication to see what actually qualify. So I'm going to put a link in the show notes to the article I wrote on exactly what qualifies as a medical expense with the IRS. So you know exactly what you can reimburse yourself for. And some of it may surprise you.

There's things in here like your eye exams or x-rays. raise or wheelchairs. So there's all different things here, dental treatment and chiropractic services. There's all different things on the list that you may think, no, the IRS would never reimbursed that. Well, they actually do. So take a look at this list and you'll be able to see if the HSA is right for you and your family. Thank you guys so much for listening. And if this is your first time listening, consider subscribing so you never miss an episode. And hey, if you get value out of this show, consider sharing it with a friend because we believe that every person in this world can build true wealth and build financial freedom. We want to share that message with everyone else because it starts

right here. It starts with financial education. And it's not taught in high schools. It's not taught in colleges. So we want everyone to understand exactly how they too can build wealth and how they can go about building an amazing financial future. Again, thank you so much for listening and I hope you You guys have a great day. Rosen lasagna, medium power, 15 minutes. Sounds like Ojo time. Let's play.

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