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

Welcome to the Good Steward Law and Wealth Podcast, where host Ledly Jennings explores law and finance to help listeners become better stewards of their wealth. Each episode covers the latest trends and strategies in estate planning, elder law, investment, and wealth management. Tune in for the knowledge and tools for financial success and security.

Hey everyone, welcome back to the Good Steward Law and Wealth Podcast. Excited to be here today because today we're going talk about the health savings account, also known as an HSA. This is one of the most underutilized accounts out there. By that, I mean, I was looking at a stat that 36% of private workers have access to this type of account, but only 12% are actually using it to its full value. So it's very underutilized, and mainly because there's not a lot of education out there. On it, but it is one of the most powerful tools because it is a wealth builder in the most efficient, uh, form of the word, but it's also a way to provide for long-term care. 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 into opening an HSA account. And how that works is they basically set up a bank account for you and give you a debit card. So you can then use that debit card to pay for qualified medical expenses, and it comes with your health plan. So whether you are employed by someone and have a work-sponsored plan, or you're self-employed and you create a health plan for your company, it comes with that, but it's a specific type of health plan is how you open it. 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. High deductible is defined, I believe in 2024 it was your deductible is $1,600 for a single person and $3,000 for a family. So if those are your deductibles, then you qualify. You're probably asking, well, why would I want a high deductible plan? Well, one reason is for the HSA account, but the other one is typically your premiums are lower So they're good for people that don't have a lot of healthcare issues. I think younger families. We'll get into more about who these accounts are really good for, but that's what comes with the 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 advantaged. So that's why everyone's talking about an HSA account. And what that means is there's 3 different tax advantages 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. Um, and who I suggest using these accounts for is people that one, either are healthy or younger. So, uh, typically they go hand in hand. Um, but you don't have a lot of recurring medical expenses. You know, maybe you go to the doctor once or twice a year, but not a lot of health issues. Um, so if you're healthy, and that usually comes with a younger family, and who I really advise on these, and my, um, favorite type of planning is, you know, the family that's 30, 35 range that have young kids, but they are now stable in their job. 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. And the third type of person it's good for is tax-savvy investors. So if you want to invest in the most tax-efficient manner, a health savings account is where you need to look because of those triple tax advantages. So when I think about, I guess, the triple tax advantages and why this is a big deal, um, is because there's really four tax advantages. You always hear triple, but I, 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, taxable income. Meaning, let's say the IRS says you have $100,000 of taxable income this year, but you donate, uh, $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, uh, pre-tax. So there's no tax when it goes in. So in that aspect, it's a lot like a 401(k). 401(k), no tax going in. The third aspect is it grows tax-free. So any investment interest that you make with that account sitting there and it grows and it's invested, all that growth is tax-free. And finally, the fourth tax advantage is you withdraw it tax-free. So basically in that aspect, it's like a Roth IRA. So it combines the benefits of a Roth and a 401(k) or regular IRA when you look at tax. So it's the most tax-advantaged account out there. Um, now how do you get involved in this type of account? Well, like I said, you open it through your employer in a high deductible plan. Usually you can only do that during open enrollment period, 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. So how much can you contribute? Well, there's two types of plans, like we mentioned earlier, a single plan and a family plan. If you're a single plan, you can contribute up to $4,150 in 2024. And then a family plan, you can contribute $8,300. Um, so that's the maximum you can contribute, but there's also a benefit of free money because a lot of plans and companies match what you put in. Like the plan that we utilize, um, matches up to $1,000 of what we put in. So if we're going to max it out, then I put in $7,300. The company puts in $1,000. So you get that $8,300 maximum that you're able to contribute. Um, so always take the free money. I'm a big fan of that, especially in 401(k)s 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, 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. Um, so that is the triple tax advantages. Now there's some nuances to this that I wanted to hit on real quick. Um, when I say you can withdraw tax-free, so if you are using it for qualified medical expenses, there's no tax. So if you use it You know, you go to the doctor and you pay for it with that debit card, no tax on that. How do you know what's qualified medical expense? Well, the IRS releases a list of assets. I believe it is a notice 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. Uh, 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% penalty. Now, if you're over 65, then you still have to pay tax on the income, but there's no penalty. So basically it just If you're over 65, it just turns into a, um, like a 401k or IRA because you're just paying tax on the income, but you can withdraw it for any reason. Let's see. The other aspect is how do you, how do you get the full benefit of the triple tax advantages? 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. It just sits there, doesn't make you any money. But you have the option of transferring that 401— I mean, that HSA to a company like Fidelity or Betterment or whoever your specific plan works with, and then you can invest it in mutual funds. So you can invest it in the S&P 500 mutual fund, index fund, and make 7% on it, and all that growth is tax-free. But then you withdraw it for medical expenses, and how you really optimize this is not using your HSA account for medical expenses 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, 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? Well, every time you purchase, uh, something that's a qualified medical expense, you save it, save the receipt, and then later on down the road, you reimburse yourself. So say I spent $100 at the pharmacy on medicine, I save the receipt of that, pay for it out of pocket, and then down the road when I'm 65 or 70, I can then reimburse myself that $100 tax-free. But the benefit is that $100 stayed invested and continued to grow tax-free. 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. So if we get a physical printed receipt, I scan those in, save it to a file, enter it in the spreadsheet. And then sometimes we get, you know, they email you a receipt when you go to the doctor or something like that. Then what we did is create a separate email account. Um, example, your family, you call it the smithfamilyhsaexpense@gmail.com. And then every time you get an emailed receipt from your doctor, just forward it to your own, um, new separate 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 tax advantage. Um, one unique thing that I've 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 supplements or even a sauna or gym or something else for your health? Well, you can, you can use those as qualified medical expenses, but it has to actually be a qualified expense. So normally, let's just use supplements as an example. A supplement like your vitamins are just considered maintenance. They would not be a qualified medical expense because it's something you take, proactively, but there's actually a new website called TruMed. 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 TruMed. 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. But in the example of supplements, there's something called a letter of medical necessity that your doctor can write., and it can be for things like supplements if it is a necessity for you. So an example that I've seen recently is someone had a history of dementia, Alzheimer's in their family. So they wanted to go to the doctor, say, hey, am I at risk for this? 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 APOE4, um, but it's shown that it gives you 20% chance of getting dementia and 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 TruMed site, use it for sauna, um, some, uh, sleeping things like Eight Sleep. They, they could qualify if you have that letter of necessity and the doctor says yes, they need this for this specific reason, to treat this reason. So that's how you can get other benefits from this. One thing I wanted to hit on really quick is how do you pass on an HSA account when we start talking estate planning? Well, 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. Now, if you list kids or non-spouse beneficiaries, they do not get all the same benefits. They just inherit the account and it's taxable to them. So you definitely want to do it to where you leave it to a spouse, but you don't really, really want to leave it to, um, other beneficiaries because they don't get all the benefits. So that's kind of how you balance how much you put into your 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. And why we do that is because it gives you some more flexibility. Um, a good example of this is a common scenario in trust I draft is we say, we're going to leave 10% to church and the other 90% to my kids. Well, if you left an HSA to your trust account, you then have some flexibility about how you can leave things. Because, you know, if you left that HSA to your kids, they're going to be taxed on it. But if you leave the HSA to a church or charity— church and charity do not, they're not taxable— so then they get the same amount of money, but your kids can get other assets. So they can get their 90% from other assets, and the 10% can be utilized to its fullest and best value. Um, Now your trust has to be drafted specifically to have a clause in there that allows your trustee to swap assets for the most tax advantageous manner. That's a common thing I put in all my trusts, but you need to verify your trust has that because not every trust does that. It's called the power to swap. So make sure your trust has that. But yes, you can leave a beneficiary on your HSA as the trust. And I hit on real quick that you could use it for long-term care. When clients come to me and say, well, you know, I'm helping their parents get qualified for Medicaid to pay for long-term care. They ask 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 to nursing home, use that to pay for that type of care. So that's the best way to proactively plan for your own care. Um, 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, then you're putting in $7,300 in my case, the company's putting in $1,000. So you're maxing it out at $8,300 per year. If you do that from age 35 to 65, assuming a 7%, um, investment return, then that account will be over $800,000. So just from 35 to 65, you've, uh, just by maxing it out, you've made over $800,000. 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. And when we start thinking about long-term care, generally, let's say that $800,000 continues to make 7%. 7% of that is about a little over $50,000 per year that you would have as income, say at 65, when you start taking retirement, you can take off $50,000 per year from that account alone. And let's say you do that for, you know, until you're 80. Then at 80, you know, that's a common age for people to need long-term care. And then you can start using your HSA account, actually just use the whole account for your long-term care. And that $800,000 that would be in there would last over 7 years at today's rates to pay for nursing home care. And most nursing home care is 5 years or less. 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 in $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 401(k), whereas an HSA, you had the $800,000. Now let's compare that to a Roth IRA. So that is, uh, it could end up in the same amount, that $800,000, but you're paying tax on the way into that. So you don't get the deduction and you have to pay FICA taxes on that amount. So I ballparked it. Let's just say that would save you about $3,000 per year doing an HSA versus a Roth, which ultimately throughout that age 35 to 65 timeframe, about $100,000 it saves you. So if you're looking from a strictly tax perspective, the HSA is the most advantageous account followed by Roth, then your 401(k), IRA. Um, so that's kind of how I would look at that, but Not many people utilize this account, and I want to make everyone aware that it's out there, and most people have access to this, and it is one of the most, uh, advantageous wealth builders and ways to pay for long-term care that there is. So that's all I wanted to hit on in this episode. I hope it provided some value for you. Thank you for listening to the Good Steward Law and Wealth Podcast, where we consider everything a gift, and it is our job to do the most with what we've been given.

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