Power Up Wealth podcast – Triple Tax Benefit – Episode 75 transcript:
James Derrick 0:00
Health savings accounts or HSAs can have a significant impact on tax savings while you work and in retirement. I’m James Derrick, and today I’ll be talking with expert and guest, Sharla Jessop about how to get the triple tax benefit of HSAs.
Sharla Jessop 0:27
Welcome to the SFS Power Up Wealth podcast, where we provide impactful insight and expert opinions on timeless financial principles and timely investment topics, preparing you to make smarter decisions with your money.
James Derrick 0:50
Thank you for joining me today, Sharla.
Sharla Jessop 0:52
Thanks for having me.
James Derrick 0:53
Sharla Jessop is President of Smedley Financial Services. She has a Certified Financial Planning designation, and she is a Health Savings Account expert. Tell us what an HSA is. First of all, for those who might not have one, they might not know and maybe some people have the ability to contribute to one and don’t even realize it. So what is an HSA?
Sharla Jessop 1:15
An HSA is for health savings account, and they’re available to you if you have an employer with an HSA plan, or you have your own individual insurance and it is HSA qualified. What that means is you have to have a higher deductible plan, meaning the deductible has to be $1,500 for a person or $3000 for a family, and then the maximum amount of pocket that you would have to pay, like with your deductible, coinsurance and everything, would be $7,500 for a person or $15,000 for a family.
James Derrick 1:47
Okay, so we’re talking about deductibles for health insurance. On the HSA, how do you fund an HSA? Is it always taken from your paycheck, just like a 401k contribution?
Sharla Jessop 2:00
Oftentimes when employers offer an HSA they will contribute some to the HSA plan. Some allow you to contribute to the HSA plan through payroll deduction, which makes a lot of sense, because it’s just like your 401k, if you don’t get it in your pocketbook, and have to think about it, it’s easier to fund the plan and keep it going, or you can fund it separately, and then take a deduction when you file your taxes. So one of the first benefits is it’s deductible to you to contribute to that plan, and it allows you to pay for your medical expenses, like coinsurance, deductibles and expenses that you have to pay, and you can pay tax-free. So you get a deduction for putting the money in, whether it’s through payroll it’s going to go in before taxes are calculated, or if you’re going to take a tax deduction when you file your taxes, just like you would if you were making a contribution to a traditional IRA.
James Derrick 2:53
Now if my employer doesn’t offer one, can I set one up myself?
Sharla Jessop 2:58
No, typically, if you’re on an employer plan. It has to be an HSA qualified plan, and they would provide the health savings account.
James Derrick 3:06
Okay, through the employer. Now, how do I know how much money to put in?
Sharla Jessop 3:10
It’s really hard, because there’s different stages of life. Generally, in the beginning years, it’s hard to put the money in and not take it right back out, especially if you have a family. Families are notorious for needing medical attention all the time if you have children, and so it’s difficult to get ahead, but you should fund it as much as possible, especially if you know you’re going to use it during the year, because it’s tax-free medical expenses for you, it doesn’t get better than that.
James Derrick 3:33
So if I think I’m going to spend, we’ll do round numbers here, $1,000 in medical expenses, then I should contribute at least $1,000. Explain why I may choose not even to use that $1,000 even if I have medical expenses.
Sharla Jessop 3:52
Well, let’s step back just just for a minute, because many people think of the old cafeteria plants where you’d put the money in for these expenses, but then you had to take it out. You had to use it by the end of the year or a couple of months into the next year, or you would lose it. And an HSA plan is not like that. The money that goes in can be used throughout your lifetime, even into retirement. So if you can overfund it, it gives you protection for periods of time when maybe you are unemployed or don’t have the income that you need and you have medical expenses, you have a way to pay for those, tax-free. Or if you’re looking further down the road into retirement. Right now, someone age 65 it’s anticipated, they’ll need about $116,000 per person to cover their medical expenses through retirement. And so if you can put money into an HSA plan and think of it as a retirement savings and continue to pay for your medical expenses out of pocket, if possible, then you’re creating a nest egg for the future when you will no longer have an income.
James Derrick 4:51
And what if I switch employers? What happens to the HSA?
Sharla Jessop 4:56
The HSA stays intact. You can no longer contribute to it unless you’re in an HSA qualified plan. But that money can stay in the HSA and continue to be used for qualifying medical expenses. Another benefit of many HSAs is they also allow you to invest that money. So think of it like you’re putting money into a 401k, and either you’re putting it in before it’s taxed, and when you take it out, it’s going to be taxed, meaning it’s a tax-deferred investment, or maybe you’re paying tax on it in the beginning, and then it’s growing like a Roth. So that’d be a 401k Roth, and then it’s tax-free. In the end, this is even better than that. You’re going to put the money in if you don’t need it, you can invest it in the market, just like you would your 401k, and in the future, when you use that money, it’s tax-free when you take it out for qualified medical expenses. So basically, you don’t have to pay any tax on the money you’re going to use for medical.
James Derrick 5:49
And this is what you’re referring to as the triple tax benefit. So it’s going in, like a traditional 401k, pre-tax. Then it grows tax-free as you invest it over time, and then you pull it out, and then it’s like the Roth, where you don’t pay tax on it as long as you use it on qualified medical expenses.
Sharla Jessop 6:09
That’s right.
James Derrick 6:09
So no taxation going in, during, or after. So I can see why this would be a huge advantage. What’s the downside?
Sharla Jessop 6:18
Well, the downside would be putting too much money in, believe it or not, you can overfund an HSA plan because maybe you’re putting too much in with market growth, and you’re going to have much more than you would need during your lifetime to cover any medical expenses. The downside of that is you don’t have the money available to use as you want. It’s restricted. It has to come out tax-free for qualifying medical expenses. If you take it out, other than that, it’s taxable to you, but it’s not lose it or use it. So if you do overfund it, you name a beneficiary, so it could be for you and your spouse while both living, and then a beneficiary that it can go to after that would be taxable to the beneficiary.
James Derrick 6:56
Okay so the spouse will still get it if you’re deceased, they get all the benefit, and then there is no penalty. It just goes to heirs, and they pay taxes on it.
Sharla Jessop 7:06
Correct.
James Derrick 7:06
And the growth.
Sharla Jessop 7:08
Right. They pay tax on the growth.
James Derrick 7:09
On the whole thing, on the whole thing.
Sharla Jessop 7:10
Just like if they had taken the money, if they had inherited a traditional IRA or 401.
James Derrick 7:15
Do they do it all at once? The taxes?
Sharla Jessop 7:18
Yes.
James Derrick 7:18
They would pay, recognize the amount all at once, and then what if you do need the money like you’ve what if you have overfunded it and you need the money in retirement or pre-retirement for something else?
Sharla Jessop 7:30
You can take the money out, but you pay tax on it.
James Derrick 7:32
Do you pay a penalty as well?
Sharla Jessop 7:34
I don’t believe there’s a penalty for that.
James Derrick 7:35
Just tax. Okay, that’s actually pretty fantastic. What else would you like people to know about contributing to HSAs.
Sharla Jessop 7:43
Well, you can max out the HSA so as an individual on a plan, can put in $4,150 for 2024. A family can save $8,300 and if you are over age 50, then you can add another $1,000 catch up to that. So you can actually put in $9,300 in 2024 into an HSA plan to help you plan for the future. Just like any other retirement planning vehicle.
James Derrick 8:08
Seems like a no brainer for anybody who’s offered an HSA, and the higher your income and the higher your tax bracket, the more beneficial it’s going to be. I could see how a lot of self employed physicians might choose to use this just to pack away a lot of money.
Sharla Jessop 8:25
Right? More money that you can put away tax-preferred, versus just 401k, because there are limits on how much you can contribute if you’ve maxed that out this is just one more tool that allows you to manage the taxes for the future.
James Derrick 8:36
Sharla, it sounds fantastic, and I love that title, triple tax benefit. Thank you for joining me today.
Sharla Jessop 8:42
Thanks James.
Shane Thomas 8:48
Thank you for joining the Power Up Wealth podcast. Smedley Financial is located at 102 S 200 E Ste 100 in Salt Lake City, UT 84111. Call us today at 800-748-4788. You can also find us on the web at Smedleyfinancial.com, Facebook, Instagram, Twitter, and LinkedIn. The views expressed are Smedley Financials and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice. Securities offered through Osaic Wealth, Inc., member FINRA/SIPC. Investment advisory services offered through Smedley Financial Services, Inc.® Osaic Wealth is separately owned, and other entities and/or marketing names, products, or services referenced here are independent of Osaic Wealth.
