#254 – Unlocking the Power of Health Savings Accounts (HSAs)

Hey, Money Boss Parents, welcome back to the Money Boss Parent podcast. I am excited for today's conversation. I want to talk about one of the most powerful tools you can use for managing your health care costs. And I'm referring to health savings accounts or short HSAs, I want to go into the nitty gritty details of how they work. What are they useful for some of the benefits you have, and potentially how you can make more money with it, because they not only act as a pass through for you to pay for your healthcare costs now or in the future, but they also could be a really great saving slash investing account as well. So let's dive into all of the details of how these magical accounts work. One of the prerequisites for you to be able to qualify to have this type of account is that you need to make sure you have a high deductible health insurance plan. High deductible health insurance plan, and I got to look up the the amounts for it right now has a specific amount of deductions you have, or a deductible you have to have in a calendar year in order for you to be able to compare and combine that with your HSA account. So one of the first things you need to do is take a look at your health insurance plan and double check to make sure that you actually have a high deductible health insurance plan. Once you know what that is, then you can determine whether a health savings account is something that you can utilize with that plan. A lot of times, employers will offer a Health Savings Account alongside of options that you get at work, but again, you got to make sure that that's a high deductible plan. So for 2020, 2420 23 an individual needs to have $1,500 as a deductible in the family. Would be $3,000 of that, so it'll be slightly more for next year. But I'm just kind of giving you an idea, because sometimes these deductibles when you're comparing health insurance could be kind of wonky. So at least $1,500 for an individual, and then double that, usually double that amount for a family if you have a family. So that's kind of like prerequisite number one side note here, if you have a health insurance plan like that through work, but your work doesn't offer a health savings account. You can actually go and search for these, and I'll talk about this too, and open a health savings account on your own, so it doesn't have to be directly available through your work. And I've done that personally myself, as long as you have documentation that you were enrolled in that plan. And then at the end of the year, when you filing your taxes, there's forms that you need to include that shows like, you know, the coordination between between the two. So, but let's talk about like, the details and what what these accounts are. Think of this HSA account as a tax deferred or tax advantaged savings account that's designed to help you save for medical expenses. And it's kind of it acts kind of like an IRA account, where you're deferring, right? You're putting pretax monies into it, and then when you take it out, and it's really just for medical expenses, you can use the funds for that. So a lot of times, these accounts are designed to be set up a savings account, so whatever funds you're contributing, the funds are growing and you're earning more money. They also could be turned into investment accounts, and you can invest in things like stocks and bonds, so that your account is really growing exponentially for you, if you are really using it more for that long term strategy. But initially, when they were started, that were used to give you this tax deduction, right, because you're deferring, deferring income, and then later on, when the money comes out and you use it for expenses, medical expenses, then you don't pay any taxes, because it's specifically for that kind of a category. So there's, again, also depends the contributions limits, which we'll talk about in a minute. But depending on you know where you land, whether you're an individual or family, you have different different levels of that. So I guess deciding or checking first where you stand with in regards to high deductible health insurance plan, and then looking at the options, does your employer offer one? Or can you go to a bank, a credit union or. Or, you know, other investment companies to open that kind of an account for yourself. So for example, just so that you have an idea contribution limits for 2024 for these accounts are the following. Individuals are 4150 so $4,150 and for families, you double that amount, you can put $8,300 into that account. If you're an individual over 55 you have an additional $1,000 contribution that you can add to that. So that's a ends up to be a pretty hefty amount. But if you think about families for the most part, who are the listeners on this podcast? We're talking about $8,300 so that's significant amount that you can put in any given calendar year and then turn around and use it for your deductibles, for auto pocket costs and things like that. But at the same time, where these types of accounts are starting to pick up. The momentum is that you actually don't spend the money in that account, because, first of all, gives you a tax deduction, it goes tax free, and when it comes out, you don't pay any taxes, so you end up actually leaving that money in the account and continue investing and growing it. So something that's known for these accounts is called triple tax advantage, right? So whatever amount you put in as as much as $808,300 in 2024, you are able to deduct on your tax return, and then it grows tax free. So, and that's one thing too, that I want to really emphasize here today that we really need to think about how to grow and invest that money because of this triple tax advantage, and then when the funds, when you're ready to take the funds. And again, reminder, these are only available and will be tax free in all of these three categories when they're used for qualified medical expenses. So things like out of pocket costs, your deductibles, physical you know, therapy costs, you know, over the calendar, drugs and like all of those kinds of things, co pays and so forth. So that's where you can have these funds available to you. Something similar that a lot of people have through their employer plans is called FSA, a flexible spending account. It works exactly the same, except that FSA has lower limits, so you don't put as much into it as a family or an individual. And the biggest drawback of the FSA is that you you put the money in, you get all the deduction, but you have to spend it in that calendar year. There's a very small amount or limit that you carry over to the next calendar year. So if you know what your expenses might be like, like, let's say you have a $1,500 deductible in your health insurance plan. Well, that is what you probably should, should shoot for and have that amount of you know, contributed to that account. So just, just kind of highlighting the options for you. But I love the HSAs because they really have afford us the flexibility of being there, kind of keeping them on the autopilot and invest it. And so like, let's say, for example, you leave your employer, right, and you you get to keep your account. You don't have to take the funds out. Or, let's say, down the road, maybe kids need braces or you do an Invisalign. And there's a list of qualified expenses that are available and allowable to be paid out of this account. So just because you can envision, like, you know, you're going to have big medical expenses in the future, you never know how these will pay out. So how do we invest these? I mentioned already there that there are, like, almost layers to this. I kind of want to think about it in two layers at the very basic, right? It acts as a savings account. So when you open an HSA account, you're often presented with an option like, Okay, here's a savings account. You have access to it. You get a debit card if you want, or checks, and then you earn whatever interest. Now, for the last few years, we've had really high interest rates, and so savings accounts were really, really good, right? Even inside these, these types of accounts, and that's good. But I want to look at the long term investment strategy with these, if you're looking at it as okay, this is our tax deferred for the future, because the longer term strategy would be for you to think about, how can you use these accounts in retirement and beyond? Right when,

once people get older, there's more need for medical expenses that you can pay for. But think about this, if you're putting the money into this now and letting it grow and compound triple tax free, think about what it could do for you when you. Get older, right? So that's where this long term investment strategy, where we actually invest the funds inside that account in simple things like stocks, bonds, ETFs, mutual funds, just whatever depends, you know, really depends what the provider of that account allows, comes to a really big, significant, you know, addition for you in the future. Now, I've done this too. Personally. I've seen clients do this professionally is where you kind of have both, and a lot of the providers, and we'll talk about them in just a minute, offer you sort of both of these options, because I feel like so. Let me give you an example. If you have an HSA account, let's say you have two components to it. You have, like, your savings bucket, which you can tap into for any out of pocket costs. Let's say you still wanted to to pull some money from it, so you would leave, you know, X amount of dollars in that, and it gives you, you know, some return, because it acts like a savings account. But then you also have a second layer to that, which would be like the investment bucket. That's where you pick, you know, certain types of investments, whatever you're comfortable with, and that acts as like your long term investing strategy bucket for that. So I want you to kind of think about them being hybrids between saving for retirement, you know, healthcare costs in the future, but also at the same time, being able to benefit from deductions and as well, as, you know, paying for whatever out of pocket costs that you have currently going on. So you might be wondering, Where can we open these types of accounts? If you just googled HSA providers, there's lots of different options. I want to talk about just a couple here, actually three or four that I've I've been accustomed with and seen clients open accounts. And you know, for a variety of reasons, like number one. And just like any investment account, number one is the cost of of these accounts. And the cost might, might come in a few in the few options here, one would be, if you have the investment component, which I strongly recommend for everybody to consider, is, what are the fees for those funds that you're, you know, going to be investing in. So that's number one. They're kind of like the fund fees also, also the management fees of the account. They're not crazy. But if you're thinking about the this in the long term, right? It might be 510, 15, $20 a year, or, you know, or some percentage of your balance over time. It adds up. So I kind of want to look at those. I mean, they seem small, but in the long at all, long run, it adds up. So here are the couple of providers that I want you to explore. So fidelity. So fidelity.com, is known for providing best investment options. I mean, fidelity is a great platform if you want to have other investment accounts. They also a lot of times provide, for one case, to employers and so forth. They don't charge commissions, and you can trade stocks without any fees as well. So there's a lot of options of what you can invest in with fidelity. I have account, and I had it for years now. It doesn't have the investment layer to it. I have to, kind of CO jointly open an account at Schwab, but I have something called HSA bank.com now I've opened it years and years ago where, like, the actual savings account was paying, this was before the last stock market crash, like, where we had interest rates, you know, in the 5% range. So I've had it for for a while, but as I as I grew it, or as there was no need for me to use the funds, they had a partnership with Schwab, and so I have kind of, like, the investment piece of Schwab. So me, it's a little bit more involved in terms of like, having another account, which is fine, but at least I know that the funds are invested two other interesting platforms that offer the same kind of options. It's really, it really all depends. Again, if your bank is offering that or credit union, take a look at the fees for the most part. You know, they can be that terrible. And you know, as long as the funds are invested, I just don't want you to blindly put the, you know, all the contributions into that account and think that's all you have to do. So option number two is called lively, and they're also known so it's lively.com They're also known for best, low fees, same kind of same same ideas, fidelity, easy to invest, easy access to the account, and it's offered through now, well, used to be TD, AmeriTrade, now it's Schwab, so it's a low cost provider, kind of a platform. And then one other option to consider is called Health Equity. You probably would see more that more of those. Accounts or options when you're have an account offered to you through an employer. And so the fees There are also very reasonable, and a lot of them offer like a robo advisor type of investment option, so you pick, like a model portfolio, and it's all invested for you. But I would start with any of these. Also see what your employer has to offer for you to get started. Now, one question I get often with, like, how do I invest my money with, with the, you know, with the health savings accounts, because I feel like it's a slightly different reasoning or rationale versus, like, how you would invest money in your IRA account, or 401, K account, or whatever other accounts you have. I view this as, again, long term strategy, especially for the investing component, like leave some money in the savings portion and use that for whatever cost you have now. But if we're talking about long term, and if you have more than 10 years to when you potentially will be investing, right? And I know you kind of have to guess and anticipate this, that then we're talking about investing definitely in the stock market, right, or component of that, and then also, like, what's your risk tolerance? Like, how aggressive you want to get with the funds? So I think it's longer to 10 years, but I would think about like, When is your retirement right? When do you see that? Is it 20 years from now? Is it 30 years from now? That's a long time. So you take advantage of that time, and according to that, you decide what risk you're willing to take. A lot of these providers also have suggestions for you that you they can help you pick what type of portfolio might be good. I wouldn't overthink it, as long as you do something with it, other than having it sit in kind of like the cash slash savings component. So, but yeah, consider investing part here as well, because that's that's where the juice is really for these accounts in the long run. Now let's talk a little bit about what you can use these accounts for. So number I mean number one reason, and the only real reason here are something called qualified medical expenses. So what are qualified medical expenses? And there's a IRS has like a laundry list of all of what these options are, but I've mentioned a couple already, like doctor visits or like co pays, for example, prescriptions, or if you have co pays for prescriptions that you're getting dental care. So that's a big one too. I actually have used that for my Invisalign number of years ago. So that was actually really handy. Vision Care. A lot of people don't have vision plans. So if you go to the doctor and have an annual checkup or whatever, if you have glasses, that's something that you can actually use your funds for, things like acupuncture, or if you go to chiropractor, some sometimes you have to pay out of pocket therapy sessions. So I mean, there is a laundry list of items that could be paid out of these accounts now or in the future. So as long as you're not using the funds to go on a fancy vacation, then then you're fine. Now you might be wondering like, how does the IRS? Because this is all the information that's going to have to be put on your tax return. Certain tax forms will be sent to you when you open these accounts. So you might be wondering like, how does the IRS know that I took the money out and didn't use it on my vacation to Europe? They don't, but you better be prepared to have good documentation, because every time you request distributions from the account, right? You say, you come to your HSA and say, Okay, I need $2,000 to cover my whatever out of pocket costs. You have to have receipts, right? Or you have to have documentation that would show that this money was spent on medical expenses. And so when you don't have that documentation and you get audited, that's when it becomes an issue. So again, for IRS, this is not like one of those places where they spend a lot of money, but if you start abusing it,

that's when it can get it can get kind of crazy, if you ask me, but I do advise to have, like, a really good documentation. What are you using it for? And, you know, and so forth. Like the HSA bank has a really good section where, like, when I do submit for request to distribute some funds to reimburse me, because a lot of times, like, you could have a debit card that you would use from this account to, just like, you know, if you, if you're the dentist office and they give you a bill, you're like, Okay, pay, pay for it with a debit card. But if you don't, you pay, you know, with your own regular funds, and then you come back and say, I'm in the reimburse myself. So you would also like, I would also annotate and say, Okay, this reimbursement was for. You know, this kind of expense. So it kind of stays all in one ecosystem. Because if you ever have to come back and change it, or come back and gather the information, because you being audited, like 10 years from now, no, actually, can't, they can't go that long, but in the next seven years, then you have all the information available. I think that's kind of like the low hanging fruit. But I just don't want you to get misleading understanding about the fact that these could be, Hey, I just use it for whatever I feel like. You can't, can't quite do that. So I mean, you have to have a high deductible health plan, and it needs to be used for medical expenses. But other than that, these are awesome type of investment accounts. I want you to think of them as investment accounts, because they really, truly are and we just need to explore, how can we just grow them, you know, even more tax free, and then really have a strategy of paying for our health care costs. So they They are, aren't just the tools for today, but I feel like there are really cool options for you to invest in the future with this flexibility of drawing today. So I hope this was useful. Let me know if you have any questions, and if there's any ideas or questions or comments around where to open the accounts. I'll have the links in the show notes. But other than that, I'm excited for you to explore how these accounts can add an additional layer of like, tax free triple tax free, savings and investing to your portfolio. All right, money boss parents, until next time, remember you are the bosses of your own money. You.