Financial Updates With Erin Kennedy & Peter Richon | Tax Brackets

We want you to plan for success. Welcome to Planning Matters Radio. Peter, it's good to see you. Today we are talking about how a health savings account can benefit your retirement plan.

It's that time of year for a lot of us. We're going to be choosing our health plans. And so we wanted to talk about high deductible plans and HSAs. How do health savings accounts work? Well, you get to contribute money to what is essentially a piggy bank for healthcare related expenses.

For premiums, for deductibles, for co-pays, for prescription drugs, and for additional medical related expenses as they may come up throughout the year. The advantage is when you earn money and put it in that HSA piggy bank, you don't have to pay tax on it then. And it grows, any growth on those dollars is also tax free. And if you use it for those qualified medical expenses, you get to withdraw the money and pay those expenses tax free as well.

So triple tax advantage is kind of the terminology that we commonly hear with that. And it's one of the very few opportunities that we have for truly tax free money. The caveat is that along with the ability to contribute those dollars to the HSA, save them and have that triple tax free advantage.

You have to have a high deductible plan, which means you may be paying lower costs and premiums along the way. But if a medical expense does come up, you may actually be responsible for more out of pocket, which is why it's important that if you do choose this option, you do fund the plan because that is your piggy bank for those higher potential costs and expenses. So, you know, as we look at that triple tax advantage, I want to ask, is this more of an investment tool or is it better utilized paying medical bills? Because I always struggle with, you know, socking the money away, not touching it or actually paying those bills as they're coming in. Well, if you've got those bills and they come in, I would absolutely use the money in your HSA.

That's its primary purpose and where it has its highest advantage. If there is a place where I can have truly tax free money, then I'm going to try to take advantage of it. And if I put the two on the balance, paying those medical expenses with money that has been taxed or paying those medical expenses with tax free money, I am going to do that each and every time.

Pay it with the tax free money. Now, if you do hit age 65 and you've built up that piggy bank and above and beyond what you may have to come out of pocket on a single year for those medical expenses, you do use it as an investment and have growth on that account. Well, at age 65, you can actually roll your HSA over to an IRA, so it does have a bit of a double purpose.

Again, one of the rare opportunities where we can multitask with money. At age 65, you can take your HSA invested account and you can invest the HSA and roll it over to an IRA. Now, you do lose the last of those triple tax advantages if you do not use it for medical expenses pre 65 and roll it over to an IRA at 65.

When you make withdrawals, they are going to be taxable as income like any other IRA dollar. And now I wanted to walk through a couple of kind of common mistakes that you see. And first on your list here, the earlier the better. Yeah, absolutely. Your young age and good health is your best asset for really building up as much as possible in this extra savings opportunity. Now, I think that there are a choice and variety of different savings opportunities.

But if you've got that HSA available to you and you have selected that path for your health coverage, then as we are younger and healthier, generally the opportunity is to stock more away, not incur those medical expenses and build more up for your future in this extra additional opportunity on top of our 401ks and IRAs. Another mistake, which you actually touched on earlier. Don't forget to fund it.

Yeah. Again, this is something that is meant as the piggy bank there. And if you've got a high deductible plan which come in combination with the ability to have the piggy bank in the first place, they are contingent upon one another. And then you have not funded the piggy bank and have a health care event. Well, you may be responsible for much higher costs to reach that copay place where, you know, your expenses are covered to reach the deductible and the maximum out of pockets is going to be a higher limit.

So you may find yourself in a place if you have not properly funded and you do run into health care expenses where you have more than offset and eaten up the advantage that you may have had from the lower premium costs. They have to be weighed carefully. And next on your list, hold on to those receipts. That's always hard, but important.

Yeah. With anything health care related, you need to make sure you document what you pay for it. You hold on to those receipts so that you can verify that they are, in fact, medical related. You can't just go shopping at Walgreens, for example, and write off your entire Walgreens trip and not picking on Walgreens in particular at the drug store, any drug store and then write off the entire trip.

They have to be medically related items and purchases in order to qualify. So do make sure you hold on to those receipts. And last on your list, this is similar to, but different from, don't forget to fund, this is don't forget to invest that money.

Right. You don't want your money just sitting in cash. Now, caveat there, you don't want your money that could potentially pay for those health care related expenses to disappear on you when you need it if there's a down market either. So what I usually recommend for clients is to keep a good chunk in cash or stable value that is equivalent to what your maximum out of pocket expenses might be for any single year. But over and above that amount, and particularly as you have had this plan for multiple years and you have funded it each year, you may have well in excess of that amount and anything over and above that amount, I do believe that you should invest for growth similar to what you might do inside of any other retirement account. Okay, so again, we are talking about the end of the year, maybe people are lucky enough to get a year end bonus, let's say that I have a $10,000 year end bonus, where should I put that money? Should I be maxing out my HSA, my Roth, my 401k?

What should I consider? Yes, all of the above. No, I mean, every opportunity that we have, if we've got excess dollars, I think that we should be looking at taking advantage of and in fact, budgeting within whatever dollars we have to try to take advantage of as many opportunities as possible. I do think that funding the HSA is a particularly good one. Because of the benefits of the triple tax advantage for healthcare related expenses, but I've got an order of operations as well. I think that we should capture all matching dollars that are available inside of our 401k. Generally, I pivot out of that and make sure that the health savings account is funded kind of as a budget line item for for healthcare expenses, whatever the higher premium amount would have been, if you did not have higher deductible plan, at least that should be going to the HSA, the delta, the difference. Roth IRAs, I think are fantastic opportunities. So then take advantage of that. And then if your 401k has a Roth component pivot back to that, and then the HSA over and above that difference. But that first year, and certainly as we get into the first couple years, we need to make sure that we've at least got enough in the HSA to cover the maximum out of pocket medical expenses we may incur.

And then after that, I think that's when the order of operations comes into play. All right, well, if somebody is again picking their health plan right now or trying to figure out where to put some extra money, which retirement account, what's the best way to reach you so they can crunch those numbers with you? 919-300-5886, 919-300-5886. You can also visit online rishonplanning.com.

It looks like richonplanning.com. All right, Peter, thank you. Always a pleasure.

Thank you. This has been Planning Matters Radio. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to seek investment, tax or legal advice from an independent professional advisor. Any investments and or investment strategies mentioned involve risk, including the possible loss principle. Advisory services offered through Brooks' Own Capital Management, a registered investment advisor. Fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission which may result in a conflict of interest regarding compensation.