this Podcast discusses the importance of utilizing Health Savings Accounts (HSA) to save on taxes and enhance net worth. It provides information on eligibility, contribution limits, investment strategies, tax advantages, and retirement planning related to HSAs. The episode emphasizes the potential for significant tax savings and the long-term impact on net worth through maximizing HSA contributions and utilizing the triple tax advantages of the account.
this Podcast discusses the importance of utilizing Health Savings Accounts (HSA) to save on taxes and enhance net worth. It provides information on eligibility, contribution limits, investment strategies, tax advantages, and retirement planning related to HSAs. The episode emphasizes the potential for significant tax savings and the long-term impact on net worth through maximizing HSA contributions and utilizing the triple tax advantages of the account.
You might be overlooking a significant opportunity to save on taxes and enhance your net worth. If you're not utilizing these strategies in your HSA today.
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And welcome to the 22nd episode of the retire early retire now podcast. I'm your host hunter Kelly owner of Palm valley wealth management. And this podcast aims to help higher earning families and pre-retirees put their money where their values are. And if this is your first time listening, go ahead and subscribe at release these episodes on Tuesday every week. So go ahead and subscribe on your favorite podcasting app. So you can be notified when they are released. And if you like what you're hearing, leave a five star review and share this with a friend. doing that helps us grow tremendously. And we'll add some value to those people's lives as well. So what are we going to talk about today? Today? We're going to talk about how we can maximize our HSA. to, again, like I said, in the intro, maximize our tax situation and enhance or maximize our net worth over time. I've talked about HSA is a couple of times throughout this podcast. so if you're curious, go check out episode number three. it was an episode on what to do toward the end of the year to maximize the following year. also episode number five. And this was with Danny white, maximizing your employee benefits. So those are very helpful, but we're going to do a deep dive. into HSHS today.
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Since I am not going over the particulars and how to maximize the HSA itself. And so what is an HSA and HSA is a health savings account. And so how do you become. Eligible for an HSA, you have to sign up for a high deductible health insurance plan. And as a 2024, what constitutes a high deductible plan is a deductible of 1600 for an individual. Or a deductible of$3,200 for a family. And remember that a deductible is that. Amount of money that you're responsible for. Before any sort of insurance coverage will start to kick in. Well, the government has done is said, okay, well, if you're going to sign up for this, basically riskier as in, I'm going to potentially owe more money out of my own pocket. If you're going to. sign up for this type of plan. We're going to allow you to contribute to an account that will help you cover that particular expense. Right? the good thing about HSA, and we'll talk about the strategies involved with this soon. the great thing about an HSA is that it is triple tax advantaged. And so what does that mean? That it means that it is pre-tax. So the money that you put in is, Above the line deduction. So if you make a hundred thousand dollars and you put$5,000 into your HSA is going to look like you made$95,000, it has deferred growth. So if you're able to invest that money and have earnings inside of that account, you will not pay taxes on that money. while it's in that account. And then the distributions that you take out for qualified medical expenses or tax-free. And there's other ways that you can get money out of that. We'll talk about here in just a little bit, and we'll talk about each three of these and how you can maximize them to one, save on taxes, but to maximize your net worth over time. where can you hold an HSA account? So again, an HSA account is just that as an account, and then it has a specific advantages with the pre-tax to, for a group. And tax-free income. And where you hold it, it could be a brokerage like Charles Schwab fidelity. there's some other smaller ones like lively HealthEquity HSA bank. and generally what I would advise is just make sure that you're picking somewhere that if this is a long-term strategy for you and you want to invest. You have a lot of options on how to invest and what type of fund you pick and all that, so that you can match it up with your objective and your risk tolerance and make sure it coincides with the other investments that you have, like in your 401k. IRAs, brokerage counts all the above, right. So how much can you contribute to an HSA in any given year? So, uh, it is tied to inflation. So as the CPI index increases, the IRS will say, Hey, we're going to, or the federal government will say, Hey, we're going to increase the HSA contribution limits each year based off of that. Right. currently you can contribute up to$4,100. in an HSA. For an individual and then$8,300. for a family.
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So now that we have the basics of what an HSA is and how we can sign up for one and contribute. Let's talk about how to maximize that to one, save on taxes and to. maximize your net worth.
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The pre-tax nature of the HSA. Really allows you to one, save on taxes and to maximize your net worth. And this is how so let's just assume that you are either single or married and you're in the 22% tax bracket. If you maximize. That HSA in any given year. You're going to save either just under a thousand dollars. Or about$1,800 a year in taxes, depending if you're married or single and your contribution rate. And so if you extrapolate that and I would assume that. HSA contribution limits are only going to increase, which would then increase your ability to save on taxes. And let's say you did the math and you took that$1,800. Thousand dollars that you're saving on taxes and you go ahead and invest that whether it be in an IRA or, into a brokerage account and you shop collate that over 15, 20, 30 years. Your net worth is going to be. Much higher than it would be if you were paying for these expenses out of pocket and not saving that$1,800 or that thousand dollars every year. toward. A brokerage account. Or an IRA Right. And so this is how we can start to see the HSA. Not only is it just an account that we can use for medical expenses. But if it's saving us on taxes, that's going to free up cash that we otherwise would've given to the U S government to invest in ourselves, whether that be brokerage. Hi, Ray so forth, right? the next thing is that deferred growth. again, if that money, if you said, Hey, I'm not going to put an HSA, I'm going to put it into some sort of brokerage account. Well, then you may be taxed on it a little bit, along with the way. So again, this is why the HSA is much better. You start to take that money and invest it because you're not using all of it every year. And you're rolling that over. each year. You're going to be able to defer those taxes, or you can essentially get into whatever investment you want for a particular objective or time horizon that you have. And risk tolerance that you have, and you can grow that bad boy as much as you want, and you're not going to oh, any taxes on that? Unless you take it out for a unqualified medical expense or just in general, if you take it out, not for medical expenses. this can be a huge, strategy in the way of growing your net worth. And then lastly, that tax-free income. So there's a couple of things that you can do. One. If you need the expenses in that given year. Well, now I can take that money out. I've gotten my$1,800 or thousand dollars of. tax savings from that deduction. If I'm in that 22% tax bracket.
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You can actually save your receipts. You can pay for that money out of pocket or your bank account. not using the HSA. Let's say you accumulate. 30$40,000 worth of medical bills. Over a certain amount of time period. Well, then you can save those receipts and pull that money out at a later date. And so now what that allows you to do is keep that money in that account. Let it grow tax deferred. And then you can pull that money out later, as long as you have record of those receipts. Pull that money out. Tax-free. And so this can be, a tax play. if you want to finagle with your tax. Tax brackets each year. whatever the case may be. Or maybe you just want to use it to let that money grow and use it as a bridge to a gap before, you're at retirement age and can get to your IRAs. What have you, so you can play that game. The next thing that you can do is you can actually use this money in retirement. So the IRS says, once you turned 65, you can actually take distributions out. Now you'll owe ordinary income on money that you have not paid taxes on. So all this money essentially should be tax-free. R, I mean, pre-tax if there's a hundred, let's just say there's a a hundred thousand dollars in there. as you start taking money off of that, a hundred thousand dollars, you owe tax taxes on that. But let's say early in your career, you made. Way more money than you are at age 65. Well now I had deferred a higher tax bracket. and I'm now paying a lower tax bracket. So then you can make up the difference there on your tax bracket. So there's a lot of different strategies that you can do with the HSA. And given that it's a triple tax advantaged account. To me makes a lot of sense too. Try to contribute. obviously if you have a complex medical situation and you know, you're hitting your out-of-pocket max every year and maybe your income doesn't support. you having one of those high deductible plans? Well, then maybe it makes more sense to pick something where the premium's a little bit higher, but your out of pocket isn't as bad. So you can have a more predictable. payment schedule and things of that nature. But if you can weather the storm and get to a point where you're, you're adding to the HSA every year and you're rolling over more and more money, and now you can start to invest that money. The tax advantages and the ability to invest that money is going to, really put you in a good situation to seriously change and maximize. Your net worth and your ability, to retire early. So having a large sum of money to help pay for health insurance, you know, you can't necessarily use it towards the premiums. But if you know, okay, well, my premium is X amount of year. I use another account to supplement those premiums, but anything out of pocket that I have to pay, I can use all then. That is a good bridge to getting to the point where you're hitting that Medicare age. So. A lot of good things that you can do here. so just give us a thought and make sure that the next time you have open enrollment. Or even this year, if you're contributing to your HSA, should I really use the money that's in it? Or should I try to pay for some stuff out of pocket so that I can get to the point where I started investing this money? just really give it thought. And if you have questions about your HSA, what should I do with it? How do I maximize this thing? Is it invested properly for how much I have? Should I have more cash? Should I. have more investments, whatever those questions are. Um, good. Go to my website, check out our process and how we work with clients. Schedule a call. I'd be happy to hop on a call with you to answer those initial HSA questions. And then see what we can do to help you further. Again, my name is hunter Kelly. I'm the host of. Retire early retire now. We had episodes every Tuesday. So go ahead and subscribe. So you can be notified when those episodes come out. And this will hopefully help you start to maximize and optimize your financial situation so that you can either retire early or retire. Now.
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You can find us at Palm valley, wm.com. And this podcast is for educational purposes only. This is not financial advice. This is not investment advice. This communication should not be relied upon. As a sole factor for investment making or financial planning decisions. If you would like help, please seek a financial tax legal or insurance professional. Please keep Palm valley wealth management in mind when making those considerations.
