Ep. 18 - The HSA Triple Play: The Most Powerful Retirement Account and Long-Term Care Strategy

Narrator: [: 00:00:00

Ledly Jennings: Hey everyone. Welcome back to the good steward law and wealth podcast. Excited to be here today because today we're going to talk about the health savings account, also known as an HSA. This is one of the most underutilized accounts out there. Uh, by that, I mean, I was looking at a stat that 36 percent of, uh, private workers have access to this type of account.

f education out there on it, [: 00:01:00

And that's why I wanted to talk about it today, because we're all about building our wealth in the most efficient manner, but also planning for what could happen. And long term care is something that could happen. So what is a health savings account? Well, it is a savings account that can be used to pay for your healthcare expenses.

So for qualified medical expenses, you can use this account to pay for it. And it comes with your health insurance plan. So if this is an option with your health insurance plan, then you opt in to opening an HSA account. And how that works is they basically set up a bank account for you and give you a debit card.

es with your health plan. So [: 00:02:00

It's called a high deductible health plan. So there's usually a few different options when you go into open enrollment with your company. And if you choose the high deductible plan, then you have access to an HSA account. Uh, high deductibles defined, I believe in 2024, it was your deductible is 1600 for a single person.

And: 3000

Um, I think younger families. Uh, we'll get into more about who these accounts are really good for, [00:03:00] but that's what comes with a high deductible plan is usually lower premiums and access to the HSA account. So it's a trade off. But why is an HSA good? And you will, if you do a quick Google on why it's good, you'll come across.

It is triple tax. It managed. So that's why everyone's talking about an HSA account. And what that means is there's three different tax it manages to it. One, uh, they're deductible. So what you put in is deductible. It can grow tax free and then you can withdraw it tax free. So it is a very tax efficient account.

I really advise on these and [: 00:04:00

They have a good income and we're really focused on wealth building. So that's when I start bringing up this HSA account, because when you're in that age range, you're focused on building your wealth and providing for your family, but also you're healthier. Typically, as, as you're younger, so these accounts work for them.

The other thing they work for, um, is when you have money to upfront your premiums and deductible. So if you have a good job, um, high paying, you have cash flow. Maybe you're younger. So you don't have a lot of savings yet, but you have plenty of cash flow. So you can pay for your healthcare expenses out of pocket.

he triple tax advantages and [: 00:05:00

There's really four tax advantages. You always hear triple, but I like to think of it as four because the first one is a deduction. So anything you put in your health savings account, it's deducted from your income. Um, taxable income, meaning let's say the IRS says you have a hundred thousand dollars of taxable income this year, but you donate a 7, 000 to your HSA.

Then that is deducted. So you really only have 93, 000 of taxable income for that year. Um, and then the other advantage that goes along with that, that's usually blended is it goes in tax of pre tax. So there's no tax when it goes in. So in that aspect, it's a lot like a 401k. Um, no tax going in. The third aspect is it grows tax free.

ou withdraw at tax free. Um, [: 00:06:00

So it's the most tax advantage advantage to count out there. Um, now how do you get involved in this type of account? Well, like I said, you open it through your employer and a high deductible plan. Usually you can only do that during open enrollment period. Um, Um, but some plans offer it other times and during that open enrollment, you sign up for the account and you also decide how much you're going to contribute.

in: 2024

Like the plan that we utilize, um, matches up to a thousand dollars of what we put in. So if we're going to max it out, then I put in 7, 300, the company puts in a thousand, so you get that 8, 300 maximum that you're able to contribute. Okay. Um, so always take the free money. I'm a, I'm a big fan of that, especially in 401ks.

Um, and that kind of thing. And when I say the plan we're in, and I talk about how new HSAs are and just becoming popular. I've only been using ours for about a year now. So we just enrolled, um, partly because, um, it's newer and I'm just discovering the tax advantages, but also we're at a phase in our life where we have the income to support medical expenses and contribute to its full extent.

wanted to hit on real quick. [: 00:08:00

No tax on that. How do you know what's qualified medical expense? Well, the IRS releases, um, a list of assets. I believe it is, um, a notice of called 502, but I'll put that in the show notes so you can actually have it. Um, but basically any expense for your medical reasons, it could be going to the doctor.

It could be going to pick up a prescription from the pharmacy. It could be physical therapy, you know, anything medical. Um, so if you use it for medical expenses, tax free. Now, what if you don't want to use it for medical expenses? You can still access the money, but there's some consequences to that. So, if you're younger than 65, then you have to pay tax on the income, and there's a 20 percent penalty.

, then [: 00:09:00

Well, the, how you want to do this is you want to always, you want to invest it in a way that it grows, and then you want to withdraw it for qualified medical expenses. And by investing, this is the way that most people underutilize their account. So when you set up your HSA, they create a bank account, give you a debit card, and it's not invested.

, uh, mutual fund index [: 00:10:00

is not using your HSA account for medical expenses. Um, until you need it later on in life. So that sounds unusual that you have this account and but we don't want to use it. So you want to pay for all your medical expenses out of pocket if you can afford it. If you have the cash flow every time you go to the doctor, pay for it with your own money.

Um, you know, out of your normal bank account, same with in, um, your prescriptions, all that, because then that money stays in your HSA account and it's growing tax free. So every bit of it grows tax free. And then you're asking, well, how do I withdraw it? Uh, tax free if it's for qual, if I'm not using it for qualified medical expenses.

ve it. Save the receipt and, [: 00:11:00

So that's where the real value comes in. And there's some nuance to this that requires a good planner. Um, you have to keep track of your receipts and you have to plan for this. So. How we do it in my household is I keep a spreadsheet of all of our assets that we pay for, um, out of pocket. I put the amount in our spreadsheet, what it was for, and then the date and time, and we save the receipt.

d is create a separate email [: 00:12:00

com. And then every time you get a, um, emailed receipt from your doctor, just forward it to your own, um, new, separate email. Email account and then once a quarter I go in and enter those, um, receipts into my spreadsheet. So you're always keeping track of that and you can keep track throughout the years, you know, maybe it's 30 years, you have a spreadsheet full of receipts and it totals a lot of money.

So you can just reimburse yourself up to that amount because, you know, you have receipts for that. So that's how you get the full, uh, tax advantage. Um, one unique thing that I have recently discovered. That you can hit on is qualified medical expenses. You know, some of the stuff's obvious. It's, it's doctor visits, you know, prescriptions, but what about other stuff like, um, supplements or even a sauna or gym or something else for your health?

Well, you can, you [: 00:13:00

But there's actually a new website called true med. It's a company that comes out that can, that, uh, you can order from their website and they tell you if you can use an HSA, uh, spending account for it. So I'd visit true med. It's a really cool website to look at. Um, and they're, they're showing you how to utilize your HSA account to its maximum potential.

so they wanted to go to the [: 00:14:00

What can I do to help out? So the doctor did a genetic test, blood test and comes back and says, yes, you have this specific gene that's shown to increase the chances of dementia and Alzheimer's. Um, in this example, I believe the gene is a POE four. Um, but it's shown that it gives you 20% chance of getting dementia in Alzheimer's than everyone else.

If you have that specific gene. So then the doctor says, well, there's things we can do to prevent that. You can take these supplements that are known to, uh, help out with this specific gene, and then he can write a letter of medical necessity for that, and then your supplements can be qualified medical expenses.

So that's a unique way that I've seen it used, um, but you have to make sure you do it the right way. Get all the proper documentation. You save that letter. That prescription is what it's like to your file. In case the IRS ever comes back and audits you. Um, I've even seen this used on the true med site.

Use [: 00:15:00

How do you pass on an HSA account when we start talking to state planning? Well, um, you can list a beneficiary on the account. So if it's a family plan and really any plan, you can list your spouse as a beneficiary and they step in your shoes of the HSA. So it becomes their account and they get all the same benefits.

other beneficiaries because [: 00:16:00

So, that's kind of how you balance how much you put into your, um, health savings account throughout your life. You don't want to put too much in there that you're making it an inheritance tool because then it doesn't get its full benefits. But for the most part, if you are maxing out your HSA, most people have higher medical expenses, you know, when you're over 65.

So you're going to use that the, um, the account, especially when you get to long term care. Um, one thing someone asked me once, can I make my trust the beneficiary of an HSA account? Yes, you can. And usually that's what I advise doing. If other than the spouse, you make the spouse, the main beneficiary, then the trust is the secondary.

n HSA to your trust account, [: 00:17:00

But if you leave the HSA to a church or charity, church and charity, do not. So then they get the same amount of money, but your kids can get other assets so they can get their 90 percent from other assets and the 10 percent can be utilized to its fullest and best value. Um, Now, your trust has to be drafted specifically, um, to set, have a clause in there that allows your trustee to swap assets, uh, for the most tax advantageous manner.

'm helping their parents get [: 00:18:00

They asked me, how do I prevent this in the future? How do I pay for long term care? If you're able, the best way is an HSA account because that is a qualified medical expense. And you get all the triple tax advantages and then when you're 85 and you go in a nursing home, use that to pay for that type of care.

So that's the best way to proactively plan for your own care. And I wanted to run a simulation here. Just to show you the power of this type of account. Uh, now, the numbers I'm using here is just back of the napkin math. I plugged it into a free compound interest calculator online. But let's say you're maxing out your HSA starting at age 35.

, assuming a [: 00:19:00

And when you decide to withdraw that it's tax free, um, if you do it the right way. And really the only money you put in was about 200, 000 of your own money to make 800, 000. So that is a big, big, uh, benefit in return. When we start thinking about long term care. Generally, let's say that 800, 000 continues to make 7%, 7 percent of that is about a little over 50, 000 per year that you would have as income.

HSA account. Actually, just [: 00:20:00

So that's more than enough to pay for your long term care. So that's why this account is so valuable. Um, and just when I do the simulation, uh, to compare it to other types of accounts. The 401k, let's say you maxed it out, you put an 8,300, um, the same as your HSA. Then throughout the years it would get that same amount of around $800,000.

But when you withdraw that money, it's taxable. So assuming, let's just say you're in the 24% tax bracket, then that would be $200,000 you would pay in taxes when you withdraw it. So really you're only getting $600,000 with a 401k. Whereas at HSA you have the $800,000. Now let's compare that to a Roth IRA.

ld end up in the same amount [: 00:21:00

So if you're looking from a strictly a tax perspective, the HSA is the most advantageous account followed by Roth, then your 401k IRA. Um, so that's kind of how I would look at that, but not many people to utilize this account. And I want to make everyone aware that it's out there and most people have access to this.

aw and wealth podcast. Where [: 00:22:00

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