Investing with your Self-directed HSA

Welcome everyone to the Directed IRA Podcast. This is Matt Sorenson, delighted to be with you today. I am running solo. Mark J. Kohler is out at a wedding and celebrating, so— but I wanted to be here for you, the listeners, to deliver some incredible topics. And today we're talking about the self-directed health savings account. So many of you are familiar with a self-directed IRA or maybe even a solo 401, but did you know you can also self-direct a health savings account? I'm going to break that down in today's podcast and video and go over how you can use a self-directed health savings account to grow and build a health savings account balance you can rely on later in life. Because we know the number one cost in retirement is medical. We can be relying on our health savings account to help cover that cost in a very tax advantageous way. Let's get into it. When most people think of a health savings account, they're thinking about the tax deductions and the benefits of getting the money in and that medical that they know they have. But I want you to focus on one critical part of the HSA, and that is the savings part. Do not be saving. You should be investing your health savings account. I want to talk about using a self-directed HSA. Many people are familiar with a self-directed IRA. That is an IRA that could be invested in to real estate, the duplex down the street, a private company, SpaceX before it went public. You can even buy crypto with a self-directed IRA, but you can also self-direct a health savings account. And so I wanna focus in today's video on how we can build a health savings account by investing in assets we know and believe in. Let's get these tax advantage funds in and invest them in the things we're excited about that we think is going to have a greater return than money sitting in a savings account or maybe even investing in an index fund or mutual fund. So I'm going to break down how you can use health savings account to bolster your balance so you have a retirement you're looking forward to. Let's first talk about this self-directed concept to make sure we're on the same page. When we're talking about putting money into your HSA, just like we may be talking about with your Roth IRA or traditional IRA. Once that money's in the account, you have the opportunity to invest it and grow it. And when we're using an HSA, we can invest that account in any asset allowed by law. Well, the law only restricts your health savings account from investing in life insurance, S corporations, and collectible items. All other investments are allowed by law. Most people who have an HSA, the only investments they know of is maybe a CD or savings account if they have an HSA. At a bank, or maybe they know publicly traded stocks, mutual funds, or index funds if they have an HSA with a broker-dealer. But that's not the limitations of what an HSA can invest in. An HSA can invest in any asset allowed by law. If you have an HSA with a custodian or provider who lets your HSA invest in any asset allowed by law, what that means is your HSA is self-directed and your HSA It can buy the duplex down the street. It can receive the rental income. It'll receive the gain when you sell the property. That all goes back into your HSA, zero tax, and it's growing this tax-advantaged balance that's gonna come out tax-free for your medical. Your HSA could own a small business. It could buy pre-IPO stock like SpaceX before it went public. It could invest in cryptocurrency. My HSAs own Bitcoin, Solana, and XRP. You can buy these non-publicly traded assets with a self-directed HSA. So that's what I'll be talking about today. So you understand how we can use this self-directed HSA, use this vehicle we're familiar with, the health savings account, but maybe we can supercharge it and do better in growing that account. So we have a large balance when we later hit age 55, 65, when we're starting to draw this money out later on in retirement. Now remember, with an HSA, you get triple tax benefits. I want to go over the HSA, setting it up, getting the money in, whether this is contributions or rollovers. We'll then talk about some of the investment rules. We'll talk about using an HSA LLC. We'll talk about using these funds for your medical. First, let's talk about setting up the HSA. Well, you must have a custodian for the HSA, and a custodian under the tax rules is a bank, credit union, trust company, or approved broker-dealer. Now we're a trust company at my company, Directed IRA. We're a directed trust company and we do HSA accounts. So we're licensed to provide these accounts. And when you use a provider of those accounts, and most people are familiar with a bank, frankly, or a broker-dealer, this could be Schwab or some HSA bank you're using for your health savings account. Most people are familiar with them, but the point here is You need a provider of the account, and this is where you establish the account and you start making the contributions. Now, when you contribute to an HSA, you can make individual contributions or you can make family contributions. Individual contribution amounts that you can put in each year is $4,400. If you're a single person, you can put $4,400 bucks each year into an HSA. You must have a high deductible plan. But if you have that, the high deductible plan that's HSA qualifying, you can be putting $4,400 a year into the HSA. If you are a family, and family could be a husband and wife, this could be a parent, child. Okay. It just has to be two people that would be considered a family under the rules. You can put in $8,750. Okay. That's $8,750 per year of contributions going into the HSA. Now, if you're 55 or older, you get to do an extra $1,000. If you're a married couple and both of you are 55 and older, you could be putting in $10,750 'cause you'd actually get an extra $2,000 you can put into the HSA. All right, so now that's getting it open and we're funding it with new contributions. Now, a lot of people who come to a self-directed HSA may actually open an account with us at Directed and they're moving funds from a TD Ameritrade HSA. Maybe it's an HSA with their employer, then their employer's throwing some money into it and they're rolling those dollars. They're transferring those existing HSA funds from their current provider over to their self-directed HSA provider. That could be us, Directed IRA, where you have a health savings account. So we get the account opened and then we start funding it, either new contributions or we're transferring over existing HSA dollars that may be with a bank HSA account or a broker-dealer HSA account. But the point is, we've got money in it. Remember, when you make new contributions into an HSA, you get a tax deduction. Next, we're going to go invest those dollars from the HSA, which there's no taxes on the investment returns or growth, and the money comes out tax-free when we're using it for qualifying medical. So a lot of people call that the triple tax benefits of the HSA, but it starts with the first one, getting the money in and contributions. All right. Now let's go to investing the health savings account and talk about some of the rules you need to know. The first thing is there are 3 restricted assets. The first one is your HSA cannot own an S corporation. It can own a C corporation, which is most publicly traded companies. It could own an LLC, it could own a limited partnership. Okay, it can own other entities. It just doesn't qualify as an S corp shareholder under tax rules. The second thing an HSA cannot invest in is collectible items. Okay, your HSA cannot own art or a wine collection or antique cars or things like that. All right, those can be investment assets, but they're restricted for HSAs and other retirement accounts. And then third, your HSA cannot own life insurance, but everything else is fair game. Okay, if you're a real estate investor and you love real estate, your HSA can do real estate deals. It could wholesale a property, it could flip a property, it can invest in a real estate syndication or a private fund. It could own the single-family property. All right, we've had many accounts here that own single-family rentals, that have flipped properties, that have invested into a syndication. All right, your HSA can do all these different real estate assets. It could private lend to other real estate investors or business owners. Where it's getting a lien on the property or a lien on any of the equipment that the business owner's using to acquire. Maybe you're someone into the tech industry or startups or certain businesses. Well, your IRA can invest in those private companies. It could invest in a venture capital fund. It could angel invest into a startup. It could have owned SpaceX stock before it went public. It could also own cryptocurrency. We have a crypto HSA where you have a wallet that your HSA owns and you can buy and sell crypto in the HSA. And of course, the gains and all the appreciation on all these assets we're talking about are building up in the health savings account. And when you're selling assets, there's a capital gain, no tax. It's not going on your 1040. It's building up in your HSA. And when it comes out for qualifying medical, you're paying zero tax on the way out. So we can invest this account in all of these non-publicly traded assets using the self-directed HSA. And of course, the benefit to doing that is I get to keep every penny of the investment returns and growth. Nothing is going to the IRS. Nothing is going to the state. We get to realize all those investment returns and growth, and every penny compounds as we're growing and building this account up. So if you think of your HSA and investing over the next 10, 20, even 30 years until you start drawing on it as a source for covering your medical costs in retirement, the value of that compounding and getting every penny to be reinvested instead of a 30% haircut going to the IRS. The difference is massive. You significantly benefit. You can have twice as much in the account as if using a taxable account where 30% is going to the IRS. All right, now the next thing on the self-directed HSA you need to know is something called the prohibited transaction rules. And this applies to all different self-directed accounts, whether this is a self-directed IRA, that's certainly a little more popular, self-directed 401. These prohibited transaction rules are quite universal. So as it applies to an HSA, what this means is your HSA is restricted on not what it can buy. The big restriction from this prohibited transaction rule is who can the health savings account transact with. If my health savings account is buying real estate, who owns the real estate now that is selling to my health savings account? If my health savings account owns a rental property, Who's the tenant paying the rent to my health savings account, right? This is something called the prohibited transaction rules. And essentially what Congress did is they said, hey, when you have a tax-advantaged account like an HSA and it's investing in these private assets, let's take real estate as the easy example. We don't want you manipulating it. And what they're worried about under these rules is you, the owner of the HSA, selling assets you personally own to your health savings account. So for example, let's say I own real estate that I bought for 100 grand. It's now worth 250 grand. And if I sell it, I'm gonna have $150,000 capital gain if I sold it personally. So what I would do is I would sell that real estate that's worth 250 grand, but I'd really only sell it for 100 grand, but I sell it to my HSA. Now, Congress knew you would do that, so they prevented a rule to restrict you from doing that, 'cause they knew you would then just sell it from your HSA to someone else for 250, and pay zero tax, and that would be quite unfair. So there is a rule that restricts you from transacting your HSA to buy assets that you currently already personally own. Okay, they also restrict your parents, your spouse, your kids. These are all called disqualified persons. When you're investing your HSA, you can't be buying or selling assets from yourself to your HSA. You can go buy real estate, go buy a rental property, investment property, flip a property, wholesale a property, You just can't be doing it from a property you personally own where you're on the other side of the transaction, nor could you be using or having benefit of the property. So as you're self-directing your HSA, you want to become familiar with these prohibited transaction rules. The biggest thing to know is don't mix yourself personally into the deal. Let your HSA invest in an investment because it's a good idea to grow and build your HSA. You're not trying to buy assets from yourself or benefit or use assets from your HSA funds. Okay, we're just trying to make a great investment. If you're doing that, you'll steer clear of the prohibited transaction rules. Now, one other strategy I just want to mention here is you can also do something called an HSA LLC. Instead of my HSA owning real estate directly or a certain asset, your HSA can own an LLC 100% and that LLC will own the property. Now, what happens in that structure is the HSA invests its cash into an LLC. The LLC has a bank account. You can be the manager of the LLC. Your HSA is the member or 100% owner of the LLC. But as manager of the HSA LLC, you'll have control of the checking account. You can be a signer on the bank account. You can be a signer for the LLC. So now when I'm buying the property at 123 Green Street, the buyer is ABC Investments LLC. I'm signing as manager of the HSA LLC to acquire the property. And I'll have a bank account in the LLC's name that is used to wire the funds or cut a check to acquire the property. And remember, the HSA's cash is getting invested from the HSA into the LLC. Kind of popular for real estate investors who are using a health savings account. But if you're wanting to do crypto or invest in a private fund or even notes, you don't need the LLC necessarily. You can just do it right out of the account. What's important to talk about next is, Let's say we've been self-directing the HSA. It's been going well. We've built a good balance in there, and now we're looking to use those funds in retirement. And remember, like I said before, medical is one of the number one costs you're gonna face in retirement. So we wanna have this special set of funds set aside so we don't have to dip into our other tax-advantaged accounts, IRAs, 401s. We're not relying on Social Security to cover our medical. That's certainly not gonna go very far. So having this HSA and a good healthy balance there is gonna really benefit us later on in retirement. Now, as you pull money out of the HSA, you can do that at any age. Frankly, you can do this before retirement, and this can be for your medical, your family, your dependents' medical. This can be for prescription drugs. This could be for dental. This could be for medical. This could be for copays. This could be for a lot of stuff you're buying at the drugstore, frankly, that's even over the counter. So there's a lot of costs that you can cover with your health savings account. But one trick that I think is critical for anyone with an HSA to know is when you're investing in growing the HSA, you may not want to dip into it. Even if you have qualifying medical, it's a smart move to let that HSA stay invested and grow. Because if I have an HSA, even if I have medical in, say, 2026, that's $3,000, but I decide to let that $3,000 stay in the HSA. I can still invest it, let it grow, and in 2036, 10 years down the road, when that HSA has grown with no tax and all this appreciation and growth, I can still withdraw that $3,000 for the medical in 2036 for the medical I had in 2026. That is still qualifying medical. So I can build the account, let it invest in a tax-advantaged way, and come back later to draw out the qualifying medical I had in prior years. So that's a great rule. And I think that's a good mindset to think about when we're thinking about a health savings account. I like to say health investment account, right? Let's invest this. And if you love self-directing, why not self-direct it? Invest in the assets you know and believe in. Let's grow it. Get this large account so we know we can rely on it later when we're in retirement and as we're older and our medical costs typically rise. All right, now I just have to say this. I want to get this in here because I have a team that does this every day at Directed IRA. You can click the link in the description in the video or on the podcast to learn about setting up a self-directed HSA. My team does this for clients across the country every day. We can help you get that account open, funded, and then you can go invest it in the assets you know and believe in. And if you've learned something in today's video or on the podcast, please like, please subscribe and share it with others. I'm Matt Sorenson. We'll see you next time.