Happy day to you. This is Ken Kaufman and I am thrilled you’re here for episode number 88, HSA Hacks. So I’m gonna just spend these few minutes with you talking through how I’ve come to strategize as part of my overall financial plan, utilizing an HSA account. Now, the first thing you have to have in place is you have to be, or you have to have health insurance, that qualifies as having a high deductible. And what that usually means is, it’s not that even though the deductible is always the highest out there in the world available. But it means that your first dollar benefits…or your first dollar medical services come out of your pocket and you’re paying…or you’re meeting your deductible for any office visits. And usually, prescriptions are included in that, all those things until you hit the deductible. And then after that, usually everything’s covered. And it might be that your deductible is $3,500 on the individual and $7,000 on a family, that’s a common structure, it can be a little bit different depending on, you know, your company, or who you’re buying from and who the insurance carrier is. But the point is, is that you have to have this HSA compatible plan or a high deductible plan that allows you to qualify to make contributions into an HSA account. When you meet that requirement, then that means that you can fund an HSA account with dollars up to a certain amount, and have all of your contribution go into the account tax-free. Now, the interesting or fascinating thing out of this is, is that you get the money back out tax-free.
Now, you remember with an IRA, and I want you to get this mindset about thinking about utilizing this as a retirement account. So, I’m gonna remind you about an IRA. A traditional IRA means you save taxes on the money that you put in now, but then you get taxed when it comes out. So, they get you when it comes out. On the Roth IRA, you’re paying taxes on the dollars going in. So, they’re getting you now, meaning the IRS is making you pay taxes now. But then as it grows over time, when you take it out, it is all tax-free.
With an HSA account, the money you put in is tax-deductible, and the money you take out is tax-free. This makes it better than a traditional IRA or a Roth IRA or just about any other savings vehicle out there and available. But the way you have to set your mindset around this as a strategy is it takes just a little bit of thinking. And then once you get it and this clicks, I hope some of you will actually take this and run with it as an outstanding financial planning opportunity and retirement planning opportunity. So, the first thing I wanna start with talking about is, if when we’re saving for retirement, the philosophy and the thought process here is that we obviously want to do it in as tax-advantaged way as possible. And when we get into retirement, most likely we’re gonna be older or maybe we’re not all the way retired, but we’re partially retired or we’re getting older in age. There is this interesting thing that happens where our consumption, a lot of times people have their house paid off by then or other things, but in terms of what’s consumed from the economy, healthcare, health care costs become a bigger and bigger percentage of the consumption of people as they get older. Nothing wrong with that, that’s normal, right, the body gets older and starts to break down. So, when you think about what’s gonna be your number one expense, or number two, or number three biggest expense when you retire, for a lot of people, if not most people that’s going to be healthcare.
And if you are set up in a way so that you can utilize funds that were tax-free going in, and then when they come out they’re tax-free, and you’re using it on health-related services and products that qualify based on the HSA rule, it’s a way to actually save a bunch of taxes. And most HSA account providers allow you to actually invest the money. It’s not just sitting and say a bank account or money market or stable value fund, where you’re getting a minimal amount of interest. And oftentimes those interest rates are set below inflation, so you’re actually losing value of your money over time. This is completely different.
Now, let me jump over and talk about the account itself. You can go to any provider and set up an HSA account, they don’t check and see if you have a high deductible plan, they don’t…I think they might ask the question but there’s no double-checking around all that. This ultimately gets reconciled on your tax return, whether or not you have a qualifying plan and if you’re allowed to deduct the contributions you put into the account. Your employer may have an option for you. Because some people when they sign up for the high deductible health plan, the employer will then contribute $500 or $1,000 a year into the HSA account or some amount, some amount per paycheck or on an annual basis. These accounts you have to watch and be careful because some of them have a monthly fee that’s charged two, three, four dollars. May not sound like much, but that can add up quite a bit over time. The goal is to find an account that is free, I personally, I like Lively, I use them, I think their online portal is super easy to access and it’s… Anyways, there’s plenty of providers out there, that’s just my preference, there’s probably better ones than that, feel free to let me know if you found something better. There’s no cost and they allow the account to be linked to TD Ameritrade, which at no cost I can transfer money from my HSA account with them where I earned a really small amount of interest and again, no monthly fees, no annual fees. I can transfer the money over to a TD Ameritrade account that’s in my name that’s connected to this HSA account and I can pick on the TD Ameritrade platform, I can pick to invest anything. And I’ll tell you this, what I do because my mindset is is that this HSA account is for retirement savings. Because of that mentality, I’m very interested in having an investment option or lots of investment options, so that I can make sure I’m investing this money so that it can grow as much as possible over the next 20, 30, however many years until I would say that I “am retired” or that I “need the money.” And I actually even my HSA account, it’s considered in my overall retirement portfolio. Because I have a traditional IRA, I have a Roth IRA, I have a 401(k). There’s a lot of things going on. And my wife has a lot of those same things. So we have a lot of accounts with a lot of different things going on. But in terms of our overall financial plan, it all gets pushed into one. And everything works together as integral parts. And so, what’s invested in the HSA account at TD Ameritrade is part of my overall asset allocation and in my whole investment strategy for my entire retirement portfolio for my wife and I.
So, anyways, that talks about the account. So, here’s the place where people get tripped up. When you get a high deductible health plan, it means you have to be ready to spend money out of pocket. And if you hit your deductible, say it’s $3,000 or $3,500 for yourself, or $5,000, or $6,000 or $7,000, for the whole family, you have to basically build up an emergency fund and have cash available ready to pay for those expenses out of pocket. Because the money you’re putting in the HSA, you’re not actually gonna take out of the HSA account and reimburse yourself. Now, that’s how most people use the HSA is, “Hey, I’m putting money in there, and it’s tax-free, when I take it out, it’s tax-free. And as long as I have the qualified medical expenses, I’ll just reimburse myself for whatever expenses I have.” That’s a great way to use the HSA. There’s nothing wrong with that. The next level is if you build up your emergency fund and in your budget you’ve got dollars allocated that are being saved, so that if you hit that deductible this year, or next or, you know, you’re adding to it. And those funds are just sitting in a bank account, they’re sitting in a savings account. I use Ally Bank, checking and savings. What I have set aside in my budget and you need a budget, it’s set aside and it’s called medical deductible. And so, we have money set in there that’s just ready and waiting to take care of that. And then all the dollars that I put over into the HSA account are going in tax-free, and then they can sit there and grow for the long term. And it is a very powerful way to save for retirement.
Now, the other thing that I wanted to make sure I was clear on and that I mentioned is that when I do have medical expenses, and I, you know incur those and I’m paying out of that deductible fund, then I’m always working to make sure that it’s filled back up again. I am saving those receipts, I am going into my Lively account, or whoever your HSA provider is you can do this. I’m taking a picture, I’m making notations. And the reason why I’m doing that is because if I ever wanted to or needed to at anytime, I could go ahead and reimburse myself for all of the medical expenses that I had. Or you know, you have other emergencies, you have other problems or you couldn’t build up enough and you needed to get reimbursed for some or all of it. And so, right now today, I have more medical expenses loaded in to my HSA account than I do balance. So, at any point in time I could pull this money out tax-free, penalty-free but I’m using this strategy of cash flowing the medical expenses that high deductible health plan isn’t contributing toward on a first-dollar basis. Meaning I go to the doctor and there’s no $40 copay, I just, I pay whatever the doctor costs, and everything comes out of my pocket until I hit my deductible. So, it’s different than that traditional insurance program that I talked about a few episodes ago. And so, at any given moment, again, I just wanna be clear on this. Right now, my HSA account has a certain amount in it. And I have more medical receipts, from braces for my kids and glasses and all of our other medical expenses that we’ve incurred over time. I have more receipts and things saved there that at any point time, I could reimburse myself 100%, it would all be tax-free and we could take that money and go use it. But I’ve invested it for a long term, I’ve got a part of my retirement portfolio, and it gives me a way to pull money out of that tax-free rather than something that’s taxable should I, you know, be doing tax planning when I’m retired. And it would be helpful if I could get some more tax-free money as opposed to taxable money coming out of accounts to either manage tax brackets or try to not have social security tax as much or whatever the tax planning strategy will be at that point down the road.
So, this is it. This is the HSA hack. It’s actually taking the program and the system, turning it into a retirement savings plan as well as part of your emergency fund savings being in cash ready to take on deductibles if you have the high deductible health plan. I do wanna mention that this year in 2020, an individual can contribute up to $3,550 and next year, that goes up to $3,600. And that’s if you’re individually covered on your high deductible plan. If your family is covered, this year you are allowed to put $7,100 a year in and next year it’s $7,200. That would be in 2021. So, if you stop and think about it, if you are only able right now with what you have access to in your life in your world, you’re only able to put $6,000 a month into an IRA, traditional Roth. This, if you’re doing a family program here with your high deductible health plan, this would more than double that. Because this year you can put $7,100 or next year $7,200 extra money in, invest it so it can grow, and it’s a great way to save for retirement. The only downfall or downside to this is you have to be able to cash flow your medical expenses as they occur. All of that being said, once this is said and done, this is a very powerful hack. A lot of people use this, it’s a way to get more money set aside and to really end up never having to use this…or never have this money taxed. And again, it’s all part of the tax code. This is all, I don’t know if legal is the right word, but this is all allowed. And the reason why is because the government set this up and the structure is around. I’m trying to help people so that they can…or give a benefit to people from a tax perspective for the dollars that they are using to pay for their medical expenses. And especially if they go with a high deductible health plan which, you know, causes us all as I mentioned in a prior episode, to think more and more like consumers.
So, there it is, the HSA hacks today, find a great account with no fees, get it and make sure that it’s attached with no cost to be able to transfer money in and out of some type of a brokerage or investment house, it gives you lots of options to be able to invest in. And then do everything you can to cash flow your deductible on your high deductible health plan, and keep that money and not need to reimburse yourself and save that money in your HSA until you’re into retirement or beyond. And then the last one is even though you may not be reimbursing yourself, put all those receipts in, keep track of it so if some point in time down the road you need to reimburse yourself it’s all there, all the documentation is there and ready. You can take the money at any point in time tax-free, penalty-free. I mean, you’re taking it from yourself in the future, but hopefully you…because you’re hopefully saving it for the future. But in this instance, it means something bad’s happened or you need access to that money for some reason, emergency or whatever, whatever your priorities are that’s, you know, that’s your thing to decide. But it gives you that flexibility so you can pull the money out, you’re not trying to get receipts or not now, oh, I can’t take all the money out because I don’t have immediate medical expenses to reimburse myself for. So, I hope this has been helpful. Many, many thanks to you for joining today. This is a wrap for episode 88. Happy day.