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1:01

is Optimal Finance Daily, Episode 2767. The

1:05

Health Savings Account Strategy that Not Enough People Are

1:07

Talking About by

1:09

Renda Chappell-Wolk with financialfinesse.com.

1:12

And I'm your host and

1:14

personal finance enthusiast, Diana Merriam.

1:16

Now Now let's get right to it as we

1:19

optimize your life. The

1:21

Health Savings Account Strategy

1:24

that not enough people are talking about by

1:29

Renda Chappell-Wilk with financialfinesse.com

1:33

I was talking to a colleague of

1:35

mine earlier this year about how awesome

1:37

health savings accounts are. And he threw

1:39

out a little known use of these delightful

1:41

accounts that made the bogus alarm go off

1:44

in my head. Even

1:46

though he's a well-respected and tenured

1:48

certified financial planner who's on the

1:50

CFP board, I didn't actually believe

1:52

him. I had to see

1:55

it for myself, but it's true. Maybe

1:57

you've heard about it, but it doesn't get much

1:59

press. conservatively,

4:00

you could tap into your HSA to

4:02

cover some expenses without taking as much

4:04

of a hit to your retirement accounts

4:06

and incur no tax or penalty. Perhaps

4:09

you're on the verge of tipping over

4:12

into a tax bracket that would require

4:14

you to pay higher capital gains tax.

4:17

You could tap into the HSA to prevent that

4:19

from happening as well. If

4:21

you qualify for a subsidy for your health

4:24

insurance through the Affordable Care Act, you

4:26

should be aware that your subsidy is

4:28

only good up to certain income limits.

4:31

In order to keep the subsidy, you must

4:33

not cross the limit. So

4:36

let's say you have retired a little

4:38

early and are funding your early retirement

4:40

with IRA withdrawals while getting health care

4:42

through the exchange, and you

4:44

qualify for a subsidy based on your income.

4:47

If you're in danger of taking out

4:49

even $100 over your earnings limit from

4:52

your IRA to cover expenses, this

4:54

would be a great time to be able to

4:56

tap into an HSA account and keep

4:58

your ACA subsidy. If

5:01

you're collecting Social Security, your Adjusted

5:03

Gross Income, or AGI, is part

5:05

of the calculation for determining how

5:07

much of your Social Security income

5:10

is taxable. If you

5:12

can fund part of your lifestyle with

5:14

HSA money, which won't increase your AGI,

5:17

you may be able to pay less tax

5:19

on your Social Security income. Or

5:22

even after you use up your tax-free

5:24

withdrawals based on medical expenses from prior

5:27

years, your account will still

5:29

provide you major benefits. Maybe

5:31

you choose not to buy a long-term care

5:34

policy. You can hold on

5:36

to the HSA to give you some peace

5:38

of mind that you have something to fall

5:40

back on if you need special care or

5:42

incur a lot of medical expenses. If

5:45

you have long-term care, you can

5:47

use your HSA balance to cover

5:49

the premiums, although some limitations apply.

5:52

In all of these scenarios, you have the

5:54

ability to use money that was never taxed,

5:57

either on the front end when invested or

5:59

on the back end when withdrawn.

6:02

Think about that. If you're in the 25% tax

6:05

bracket, it's like getting a 25%

6:07

discount on all of your medical expenses

6:09

or whatever you end up spending the

6:11

money on. You can also

6:13

take the money out for non-medical expenses after

6:16

you turn age 65 and pay income tax

6:19

on the withdrawal but incur no

6:21

penalty. Assuming you could

6:24

afford to pay your medical expenses

6:26

out of pocket before you retire,

6:28

accumulating funds in an HSA account can be

6:30

a great option to consider. You

6:36

just listened to the post titled, The

6:38

Health Savings Account Strategy That Not Enough

6:40

People Are Talking About by

6:43

Renda Chappell-Wolk with financialfinesse.com

6:46

and I'll be right back with my commentary. Have

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you been frustrated with personal finance apps

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kid's college? I found that Monarch

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your extended

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30-day free

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trial. free

8:01

trial. HSA's are

8:03

the only investment vehicle that have a

8:05

triple tax advantage, in that

8:07

you contribute tax-free, they grow tax-free,

8:10

and you can withdraw tax-free when

8:12

used for qualified medical expenses. To

8:15

fully optimize this account, you could pay

8:17

your medical expenses with your cash on

8:20

hand and allow tax-free compound interest to

8:22

keep working its magic in your HSA.

8:25

You'd simply keep the receipts, since there's

8:27

no limitation on when a health care

8:29

expense is incurred and when it's reimbursed.

8:32

And if cash gets tight for living

8:34

expenses at some point, you can submit

8:37

the receipts for reimbursement. For

8:39

most retirement accounts, withdrawing money at a

8:41

time of a cash crunch is usually

8:43

done by either accepting a

8:45

10% early withdrawal penalty, withdrawing

8:48

Roth IRA contributions, or

8:50

by taking a loan on your 401k. For

8:53

the HSA, the funds are accessible

8:55

before age 59.5 if used on

8:58

qualifying medical expenses. Adding

9:00

to the flexibility, the list of medical

9:02

expenses that the IRS views as qualified

9:05

is long. It includes

9:07

items such as doctor's visits,

9:09

dental exams, lab fees, physical

9:12

therapy, long-term care, and Medicare

9:14

premiums. While the HSA

9:16

does have a 20% penalty if funds

9:18

are withdrawn and not used for qualified

9:20

medical expenses, after age 65

9:23

this penalty drops off. So

9:25

if you find yourself over 65 and

9:27

in a situation where you need to

9:29

tap your HSA and don't have enough

9:31

medical expenses, the withdrawals are taxed but

9:34

not penalized. In other

9:36

words, you still receive the tax-deferred

9:38

contribution from the years prior and

9:40

all the tax-deferred growth while only

9:42

losing the tax-free withdrawal, similar to

9:44

the tax benefits of an IRA.

9:47

But unlike an IRA, the HSA

9:49

does not have required minimum distributions.

9:53

None of us know what our healthcare needs will be later

9:55

in life, but I think it's safe to

9:57

assume that as we age, our healthcare needs will increase.