Transcript:
Easan Arulanantham:
Should I take money out of my health savings account, or a lot of people refer to it as HSA? Or should I just leave it and let it grow?
Tom Vaughan:
This is actually quite interesting. I’ve got a visual here, we can talk about what you can put in there. These are some of the limits that are that are happening from, from the last couple of years as to what you can contribute. So an HSA health savings account is actually quite unique. Because whatever you have in there can grow tax free. Now in more and more, they’re having HSAs that allow you to kind of pick different investments, not not all of them. But so you could theoretically have some stock market investment gains over a long period of time, that grow completely tax free. The other part that’s very, very unique is that you actually get it as a write off also. So if I put in $5,000, I don’t have to put that on my tax return. Yep. So that’s pretty unique. There’s only one other thing I can think about like that a couple of the 529 state plans work that way. But the criteria then is though, I have to take the money out to spend it on medical costs, and there’s different things that they call medical costs. But one of the strategies that should be thought about here is the possibility of accumulating money in the HSA, which almost nobody thinks about it, most people put it in, and then they take it out to pay that year’s medical costs, and leave and say, Hey, I think I might have $5,000, this year, I’m gonna put in 5000, they take out 5000, by the end of the year. What they’re doing though, is they’re missing out on tax free growth.
Now, some people don’t have a choice, if you don’t have excess money that you can save, then that’s what you should do. I don’t have access money. But if I put in 5000, and I can pay my $5,000 cost with other monies outside the HSA, now I can let it grow. Maybe that turns into 6000 or 7000, or 8000. You could really make that grow until retirement, and then you get to retirement, now you got this pool of money that is available to help you pay your medical costs, deductibles, I’ve even heard that you can pay your Medicare cost itself directly using your HSA. You’ve got this retirement benefit that’s growing tax free. I’ve seen people with over $100,000 in their HSA heading into retirement. It’s very powerful. I mean, really, really neat. This is one tidbit you can pass along to your children or your grandchildren is, if you’re a younger age, most likely your medical expenses will be lower. That’s when you kind of utilize these HSAs. Then I recommend that you let them grow until your retirement and you even if you put a little bit of money, it can grow to a massive sum just by compounding interest. Oh, it’s incredible.
You always want to maximize your 401k match. So whatever, if you’re at a company has a 401k, and they have a match put enough money in there to get that match, because that’s 100% rate of return on that. So that’s really, really powerful. But then maybe look at the HSA. Also, it’s not it’s a very, not everybody has him, right, you have to have a program at work. If you do have one, it’s worth looking at in terms of another place to start to kind of get some money in it can only be used for medical expenses. If you happen to get into retirement and not need it, that could be waste. But I haven’t seen that happen, honestly, because medical expenses are pretty like death and taxes, they’re kind of kind of nearly a certainty — just deductibles on prescriptions and things along those lines are enough to kind of eat into a lot of areas. HSA is you’re only eligible if you’re in a high deductible health plan.
You have to know which insurance you’re actually picking for the year. So when you enroll a usually says, this is an HSA eligible insurance or something like that, that you can do it. I saw a report from Fidelity last year that said that the average person will spend $237,000 during their retirement on medical costs. So think about that, if you had that, for example, in an HSA program, he could pay it all tax free, because otherwise during retirement, you’re paying that $237,000 Mostly without any write up write off because in order to get a write off a medical costs, you have to spend so much per year and that can happen, right and long term care. I do have some clients that are getting write offs. But wouldn’t it be nice to have a big chunk of money in an HSA program to kind of offset that for somebody’s retirement? Because now it’s growing tax free? I can take it out tax free for those expenses. So really, really powerful concept.