Your Guide to Saving Money with an HSA Now and in Retirement

If you’re looking for a clever way to cut your taxes, pay less for health care and build retirement savings. A Health Savings Account delivers this podcast will help you start an HSA understand the rules and use this clever account to your financial advantage. Hello, friends and thank you for joining me this week.

My name is Laura Adams and I’m a personal finance and small business expert and author who’s been hosting the money girl podcast since 2008. My mission is to help you get the knowledge and motivation to prioritize your finances, build wealth, and have more security and less stress. Every show is created to make sure you come away with practical advice that helps you make better money decisions and takes your financial life to the next level. Be sure to subscribe and participate I would love for you to send me your money questions, your comments, your ideas for future shows, you can do that 24/7 By calling our voicemail line, that’s 302-364-0308. You can also email me using my contact page at Laura D adams.com.

Where you can connect with me on Instagram at Laura D Adams. And if you want to read a companion blog post for this or any podcast, we post them every week there in the money girl section at quick and dirty tips.com. That’s really helpful if you want to remember something that I mentioned here. Today’s episode is episode number 701 called Your Guide to saving money with an HSA now and in retirement. And today I’m going to cover your questions at the end of the show. So stay with me. Alright, if you’ve been listening to money girl for any length of time, you probably know that one of my favorite tax-advantaged accounts is a health savings account or HSA.

And not only does an HSA allow you to pay for a wide variety of health care expenses with pre tax money, but you can spend it any way you want after your 65th birthday. It’s a really clever legal way to pay less tax, save more and invest for the future. All that being said having an HSA does come with some particular rules that you have to follow or pay a hefty penalty. So this podcast is going to cover some tips to use an HSA wisely, I’m going to give you seven significant benefits that they offer. And I’ll give you some updates on some new and often surprising allowable expenses. So let’s start out by just talking generally about what is a health savings account? Well, an HSA is a tax free account for the sole purpose of paying allowable health care expenses. But to qualify for this special account, you’ve got to have a particular type of health insurance, which I’ll cover more about in a moment. You can contribute to an HSA if you purchase an HSA eligible health plan. And again, I’ll talk more about it. But you can get it on your own as an individual or through your employer’s group health insurance plan. When you’ve got an HSA, you always own and manage it on your own. It’s yours as an individual. And there are no income limits to qualify. Basically, if you’ve got the right health plan, you can have an HSA no matter what. In other words, you don’t need permission from an employer or from the IRS to set up an HSA. And it’s really cool because it stays with you if you change your job, or even become unemployed, even if you lose your HSA eligible insurance like you know you switch from an HSA eligible plan to one that is not HSA eligible.

You can continue spending your HSA balance, but you’re just not eligible to make any new contributions to the account. The beauty of an HSA is that your contributions are deductible on your tax return, even if you don’t itemize deductions, and the funds that you put in the account can earn interest or you can even invest some or all of them for potential growth and a menu of options like mutual funds or exchange traded funds. The investment options are going to depend on your HSA provider. So it makes sense to shop around before you set up your HSA. Just make sure it’s gonna have all the things that you want kind of all the bells and whistles and all the investment features that you want. Then when you take distributions from an HSA to pay for qualified health care expenses, your original contributions plus any earnings in the account that can be interest earnings or investment earnings are entirely tax free.

Contrary additions to an HSA can come from you or even from someone else, like a family member or even an employer. Many companies will offer HSA benefits such as giving regular deposits into your HSA kind of like matching funds for a retirement plan. Any HSA contributions that come from an employer do not get included in your taxable income.

So it’s just a really fantastic benefit, depending on your income tax rate. Using an HSA to pay for allowable health care expenses on a tax free basis means getting about a 20 to 30% discount on all of those expenses over your lifetime, that can add up to massive savings. However, similar to a retirement account, you should never put money in an HSA that you might need to spend for everyday expenses, like your rent or your mortgage or for groceries. Because until you turn 65 years old, you can only use those HSA funds to pay for current or future qualified unreimbursed health care expenses. And if you spend it on anything else, you’re going to be subject to a hefty penalty. pulling money out of an HSA to spend on non qualified expenses, like groceries, clothes or a vacation means that you are going to pay income tax on those amounts, plus an additional 20% penalty on those withdrawn amounts. So that’s a that’s a pretty hefty penalty that you do not want to pay.

A common question that I get is what’s the difference between an HSA and an FSA. So these are two popular types of accounts. And I want to make sure you understand the difference. So an FSA is a flexible spending account. Now that can only be offered by an employer. And it’s got to be funded through payroll deductions. And it’s also coming on a pre tax basis. And FSA is kind of unique because it’s got an annual use it or lose it policy. So that means you gotta spend what’s in the account every year or you literally lose it. But with an HSA, there is no deadline to spend your balance. The funds in an HSA can stay there literally indefinitely. I mean, you could max it out every single year, and not spend a dime of it, it can just roll over from year to year. And even if you change your insurance company, you become uninsured or you’re unemployed, the funds just stay in there and roll over year to year. So don’t confuse these two accounts.

They might sound similar, but they’ve got you know, some key differences. Again, it dividuals can open an HSA and it permits tax deductible contributions with no spending deadline. But an FSA can only be offered in the workplace, and you must spend all or most of your balance every calendar year.

So let’s talk about who qualifies for an HSA. I mentioned that you need a particular type of health insurance to qualify, only those who have a high deductible health plan are eligible to open an HSA. And as a reminder, the deductible is the amount that you’ve got to pay out of your own pocket for covered healthcare expenses before your insurance benefits begin each year. While you might think that it’s better to have a lower deductible and pay less out of pocket, having a higher deductible reduces your monthly insurance premiums pretty significantly. deductibles and your premiums have a seesaw relationship because increasing one makes the other go down. More and more employers are offering high deductible health plans to help their workers keep premiums as low as possible. So no matter whether you get health insurance on your own as an individual, or through work, you want to find out if it’s HSA qualified so you can get all the medical savings possible. The current IRS rule for high deductible health plan says that the minimum annual deductible for in network care is $1,400.

And the maximum for the annual deductible and other out of pocket expenses is $7,000. Now that applies if you purchase a health plan just for yourself, but if you have a family plan, those double so the minimum deductible would be $2,800. And the maximum out of pocket would need to be $14,000. The IRS allows high deductible health plans to offer preventative care with no deductible. So there are some medical services that you can get before you meet these high deductibles. But having an HSA eligible health plan means you’re gonna have some high out of pocket costs. So they’re not the right choice for everyone. In general.

They’re an excellent coverage when you’re in relatively good health, and you’re not likely to spend the full deductible every year. So let’s talk about what you can put into an HSA. If you qualify for 2021, you can contribute up to $3,600 to an HSA, when you’ve got an individual health plan, or up to $7,200 a year with a family plan. Now, if you’re over age 55, you can actually contribute an additional $1,000 for either type. So that would bring it up to 4600 bucks for an individual plan, or up to $8,200 a year with a family plan. Now, the limits are going up slightly for 2022. The HSA contribution limit for individual insurance increases slightly to $3,650. And the family plan cap goes up to 7300. You can make tax deductible contributions anytime during the year, even up to April 15 for the prior year. But you’re never required to make contributions to an HSA. So if there’s a year where you know, you just don’t have the extra savings, it’s not a problem again, the balance that you have just rolls over from year to year.

Now I mentioned that you can use an HS a in retirement a little differently. This is an often forgotten benefit. After the age of 65. You can spend HSA funds on non qualified expenses without paying that hefty 20% penalty. However, you still need to pay income tax on those amounts that you take out. So that means that an HSA turns into something pretty similar to a traditional retirement account, if you keep it long enough, that’s a great reason to max it out every year, even if you don’t expect many health care expenses. I know a lot of people who use an HSA solely as a retirement vehicle, they max it out every year and they would never dream of touching it even for their qualified medical expenses.

So let’s talk about what are HSA qualified health care expenses. Once you’ve opened an HSA and you’ve got money in the account, you need to understand how to spend it. qualified expenses include a really wide range of health costs that you might incur until you meet your annual deductible, or expenses that are simply not covered by your health insurance. The IRS says for an expense to be HSA qualified, it must pay for health care services, equipment or medications. And there are many covered expenses that you might not expect. And I’m going to cover 10 of them next, so I’m going to cover 10 Surprising HSA qualified health care expenses. And there are literally hundreds of potential expenses and you can see the full list in IRS Publication 502 medical and dental expenses.

I will include a link to that in the notes for the show again there in the money girl section at quick and dirty tips.com. But I’m going to cover 10 qualified medical expenses right now that might surprise you. Number one is chiropractic care. All chiropractic is HSA qualified, even if your insurance plan does not cover it. So that means you can explore this alternative for pain relief before you go for medication or surgery. Number two, birth control. If your doctor prescribes birth control, you can use your HSA to pay for it. Number three eye surgery. Any costs you might have to pay out of pocket for surgery to correct your vision such as LASIK or the removal of cataracts can be paid for using HSA funds. And if your sight or hearing is impaired you can also use it to purchase and care for a guide dog or other service animal and of course also for prescription eyeglasses and prescription sunglasses. Number four dental care going to the dentist is also covered for routine cleanings and the prevention of dental disease. You can use your HSA for services like fluoride treatments, X rays, fillings, extractions, dentures and braces. Teeth Whitening is not a qualified expense nor is any cost or therapy that’s purely cosmetic. Although some might consider them primarily cosmetic artificial teeth are an HSA eligible expense. So you can use these HSA funds for dental care even if you don’t have dental insurance. Number five, acupuncture this one surprises a lot of people so even if your health insurance does not cover acupuncture, you can use your HSA to pay for it tax free.

Number six fertility enhancement. You can use an HSA to pay for any treatment to overcome an inability to have children such as in vitro fertilization. Once you’re a parent, you can also spend it on things like breast pumps and supplies that assist lactation. Or you can use an HSA to go in the opposite direction and pay for sterilization or legal abortion.

Number seven, drug and alcohol addiction treatment, any amount you pay for yourself or a family member to have inpatient treatment at a drug rehabilitation center, including meals and lodging is HSA qualified, you can also pay for transportation to and from Alcoholics Anonymous meetings in your community, assuming a medical provider has deemed a attendance medically necessary for you. Number eight, care from a psychologist or psychiatrist. You can use HSA funds for the cost to support yourself or a family member who you claim as a dependent through the treatment of a mental condition or illness. You can use HSA funds to pay for a patient’s treatment at a health institute if a physician prescribes treatment to alleviate a physical or a mental disability or illness. Number nine home improvements.

Any special equipment or improvements that are installed in a home to care for yourself or your dependent family members can be paid for with an HSA if the purpose is medical care. These might include constructing entrance ramps, widening doorways, installing lifts or lowering cabinets and sinks. Another capital expense that’s HSA qualified is removing lead based paint in a home that you own or rent and number 10 transportation and travel costs to get to and from any medical care, such as on a bus train plane taxi ambulance can be paid for with HSA money. This rule includes making regular visits to see an ill family member if visits get recommended as part of treatment. Like maybe you’re the parent of a sick child and you need to visit them at their treatment facility. You can include lodging, but not meals when you travel to another city for medical purposes. If you use your own vehicle to get to medical services, you can use HSA money to cover certain out of pocket costs, including gas, oil, tolls and parking fees. You cannot cover general vehicle maintenance or insurance costs though. It’s also worth noting that in March 2020, the Cares Act expanded eligible HSA expenses.

Here are new products and services that you can now pay for using an HSA. Menstrual care products such as tampons, sanitary napkins and menstrual cups over the counter medications such as cold and flu medicine, pain relievers, sleep aids, eye drops and remedies for indigestion, acne and motion sickness and telehealth services through the end of 2021. And additionally, High Deductible Health Plans can have a $0 deductible for telehealth services, just like for preventive care. So let’s review the tax benefits of using an HSA, you get three tax benefits from an HSA that are not available with any other tax advantaged account. Retirement accounts give you a lot of benefits, but they don’t give you all three of these tax benefits that you get with an HSA.

So number one, if you’re eligible to contribute to an HSA, your contributions are tax deductible, up to an annual limit. For instance, if you’re over 55, and you’ve got a family health plan, you could contribute up to $8,200. And that cuts your taxable income for 2021 by $8,200. Alright, the second tax benefit is while your money is in the HSA, it is growing tax deferred, you don’t have to pay annual taxes on interest income or investment earnings in the account. And the third benefit is that when you take a withdrawal from an HSA to spend it on qualified health care expenses, it’s entirely tax free. So those are pretty good benefits. But using an HSA gives you even more advantages. Wait, there’s more. funds remain in the account from year to year for your entire life with no penalty if you don’t spend them. And the funds can be used for you, your spouse or your dependents for qualified out of pocket medical expenses. And you own the account and decide how much to save or spend each year. So let’s say you’ve got an HSA qualified health plan at work, and so does your spouse you’ve got different plans, and you each qualify individually for an HSA, you each get to max out your HSAs as individuals, but if you let’s say you’ve got a plan but your spouse is a stay at home spouse and doesn’t work, then you probably got a family plan a family insurance. And you can just put in those family limits that I mentioned. Another huge benefit is that an HSA is portable.

So if you change employers, you switch health plans or you become unemployed, that account is yours to keep and you can continue spending it, you just can’t keep adding new funds to the account if you don’t have a qualified health plan. And you can fund an HSA for the first time using the money you have already saved in an IRA by doing a tax free rollover once in your lifetime, up to the annual contribution limits. That’s actually how I funded my very first HSA a long time ago, using funds in my traditional IRA. So how do you open and fund an HSA? Well, if you qualify for an HSA mir available at many institutions like banks, you know, credit unions, there’s just a bunch of different options. They’re convenient to use, and most offer paper checks, debit cards, and online banking and probably have an app as well. If you want to quickly review the Health Savings Account rules, and some of my favorite places to open your HSA. You want to download my free HSA cheat sheet. It’s a one page guide that summarizes the updated requirements and everything you need to know to get the cheat sheet simply text the phrase, HS a tool HS ATOL to the number 33444.

All right, I hope that’s been helpful to understand how these amazing accounts work. And now we’re going to get on to your questions. I got one from Mark, who says, Thank you so much for your great show. I’ve started investing over the past year, and I’ve learned so much from listening to your podcast, I’m 28 years old and at the beginning of my career, so I would rather pay taxes now than in the future, when I assume I’ll be in a higher tax bracket. I have self employment income from a side gig as well as income from a 1099 job and a separate w two job. I have a few questions with the first question the most pressing. Number one, I’m set to max out my Roth IRA for the year soon.

After I do that, should I invest any additional money in a regular brokerage account? A simple IRA, a SEP IRA or a solo 401k? Marc, thank you so so much for your kind words, and congratulations on diversifying your income and getting serious about building wealth for the future? The answer to your first question is yes, you definitely need to keep investing. Since you’ve got a side gig and 1099 income, you qualify for a retirement account from the self employed. So I would look at making Roth contributions to a solo 401 K. Now with a SEP IRA, you only can make traditional contributions. So I would encourage you to go with the solo 401k Make Roth contributions with the solo 401k, you can put in up to 25% of your net business income, up to $58,000, for 2021. So that allows you to contribute much more than an IRA and to get fantastic tax savings. So you can max out both the solo 401k and the Roth IRA in the same year. And you know, as you earn more on the side, you’ll be able to contribute more and more each year to that solo 401k. Alright, Mark. Second question is, what’s your view on investing in real estate, such as with the platform Fundrise being that the funds will be illiquid for a few years? Mark, I definitely think there’s a place for real estate in everyone’s portfolio.

So if you don’t already own a home or tangible investment property, consider limiting real estate funds to a percentage of your portfolio, you know, you want to think about limiting your exposure and having a diversified portfolio. So maybe the right percentage might be something like 5%, up to 10% of your portfolio. But if you already own a home, that means you probably got a lot of your portfolio already tied up in real estate. So this is going to just depend on what you already own. But if you have no exposure to real estate at all, yes, definitely, you know, consider getting a small exposure to it. Mark’s third question is do you have any recommendations for how to pick ETF stocks to invest in? Well, your ETF choices and by the way, ETF, for those who are not familiar is an exchange traded fund, and these are funds you know, you can kind of think of them like mutual funds, but they trade on the market throughout the day.

So they kind of act like a stock. But you know, they’re more like a mutual fund because they’ve got hundreds or even 1000s of underlying investments within them. So your ETF choices will depend on the investing platform you use, like a betterman or fidelity. Now, Mark, since you’re young, and you’ve got a very long retirement horizon, I’m going to recommend choosing one or more ETFs that are primarily made up of stocks, you should be super heavy in stocks. Marc’s fourth question is, what is your view on investing in individual stocks recommended by a Stock Advisor.

So I would say that picking stocks is, you know, it’s much riskier than investing in a stock ETF, which is diversified. The ETF, again, might be made up of hundreds or 1000s of underlying stocks, your goal should be to own as many stocks as possible. And you can really only do that through ETFs or mutual funds. However, I would say that if you max out your Roth IRA and you max out your Roth solo 401k, and you’ve still got more money to invest, you could speculate a little bit on an individual stock or two.

Again, I would make an a small portion of your overall portfolio such as no more than let’s say, one to 3%, you want to limit the downside. If that stock, just you know, falls off a cliff, you want to make sure that that’s not happening to a large percentage of your portfolio. Mark. I hope that helps. And before we go, I want to invite you to join my free private Facebook group called dominate your dollars. It is an amazing group of people who are asking fantastic questions. They’re helping each other and they’re reaching ambitious financial goals. Just search for the group on Facebook or text the word dollars, d o l l a r s to the number 33444. And I will send you a direct invitation to the group. You can also visit Laura de adams.com, where you’ll find my contact page, and more about me my books and online classes.

That’s all for now. I’ll talk to you next week. Until then, here’s to living a richer life. Money girl is a quick and dirty tips podcast. It’s audio engineered by Steve Rickey Berg with script editing by Adam season. Our operations and Editorial Manager is Michelle Margolis. Our assistant manager is Emily Miller, and our marketing and publicity assistant is Davina Tomlin.