Why HSA Accounts Are So Powerful

Today, we're tackling a question that's been coming up quite a bit - the power of HSA accounts. 

Now, if you've ever wondered just how impactful they can be for your investments and medical care, stick around, and I'll break it down for you.

I'm thrilled to dive into today's episode, addressing a question from Kevin about HSA accounts. 

We'll unravel the layers of this financial tool, discussing qualification criteria, the triple tax advantages it offers, and the strategic ways to make the most out of it. This episode is all about empowering you to make the most informed financial decisions.

So, if you're curious about optimizing your investments and managing medical expenses wisely, this episode is tailor-made for you.

Have burning questions about finance, entrepreneurship, or anything in between? Drop them at askmelnow.com, and I might just answer them in the next episode. Let's make this journey to financial liberation a collaborative and enlightening experience. Can't wait to hear from you!

IN TODAY’S EPISODE, I DISCUSS: 

• The criteria for qualifying for an HSA account
• The triple tax advantages of HSA accounts
• The long-term investment potential of HSA accounts

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If you liked this episode, you'll love these ones:

• Should You Use a HELOC to Payoff Your Mortgage?
• What to Do Today to Pay Less Tax and Keep More Money
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• Q&A Why Taking a 401K Loan Can Destroy Your Wealth

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Transcript

1:56

Hey there. In this episode, The Affluent Entrepreneur Show, I get to do one of my favorite things, and that is answering your questions. If you don't know I have a question hotline, you go to askmelnow.com. Leave me your questions. And on this episode, I'm going to answer one of your questions. And really what this is about is about one of the most powerful accounts that you can have from an investing. Standpoint if you qualify, called an HSA account. Let's dig in. Let me show you how powerful this is from your perspective, from an investing perspective, and from your medical care perspective if it applies to you. Welcome to this episode of the affluent entrepreneur show. Let's do this thing. This is the Affluent Entrepreneur Show for entrepreneurs that want to operate at a high level and achieve financial liberation. I'm your host, Mel Abraham, and I'll be sharing with you what it takes to create success beyond wealth so you can have a richer, more fulfilling lifestyle. In this show, you'll learn how business and money intersect so you can scale your business, scale your money, and scale your life while creating a deeper impact and living with complete freedom, because that's what it really means to be an affluent entrepreneur. All right. Welcome to this episode of the affluent entrepreneur show. This episode, I get a chance to do one of my favorite things, and that is to answer your questions. And this question is something that has come up a few times. And so I want to dig in. And really start to break it down, and that is this idea of an HSA account. Let's take a look at the question that came in from Kevin. He says, can you put too much into an HSA account? So, Kevin, we're coming at you. We're going to dig in, and we're. Going to dig in deep. So let's first talk about, well, what. Is an HSA account? HSA stands for health savings account. All right. And there's some very specific criteria to qualify to have this type of account. You can get it privately on your own. You can also get it through your. Employer in doing that. So let's look at the criteria so you start to understand the dynamics of what goes on there. And so the first is to understand. It'S an account that is for you. As an individual, but it is tied to what's called a high deductible health plan, healthcare plan. And it's a place where you put money away for your medical expenses. And so when done correctly, what you're. Going to do is you can put money into this account, you can take a tax deduction for it, and when you take money out of the account to pay qualified medical expenses, there is no tax on it. So it's a great account. But if you notice, it says it's. A high deductible health plan. That means that in order to use. An account, an HSA account, you have to have a qualified medical plan, meaning that you're going to pay higher deductibles and higher costs on the plan side. And that's why it's not for everyone. So, for instance, in my situation where. I know that I have a fair amount of medical costs just on the ongoing treatments or checkups and everything because of the post cancer, it's not really a good option for us because we know that we're going to eat up that deductible pretty doggone quick. If you're in a situation that maybe. You don't you're healthy, you don't expect a whole lot of medical expenses and everything, then maybe this is a way to go because one, the premiums are going to be less because the deductibles. Are higher and you can put money. Away, take a tax deduction for it. We're going to show you how to use this account, though, the right way, because you can really build a whole lot of wealth via the so there are some things here. Now, the other thing with an HSA account is you can actually elect in. And out of it year after year. So if, for instance, you don't have a whole lot of medical expenses, you go into an HSA account. It's a high deductible account plan that you're on, and you're healthy, everything's fine. You get married, and all of a sudden not all of a sudden, but your wife gets pregnant and now you're expecting a child as a couple. Well, we know that when you're going. To have a baby, there's going to be some more medical expenses. So maybe in that year you won't use the HSA and you won't use a high deductible plan and you'll elect a different type of plan to serve you better for that year. And then the following year you can go back to it or something like that. So it isn't something that you're locked. In for decades and you can elect. In and out of it each year as necessary. So let's just take a look at some of the other things that come into play when it comes to a health savings account. So the first is that, like we said, you have to be enrolled in a high deductible plan. It has to be HSA qualified. Doesn't mean that you look at the plan, you go, that's a high deductible. Your determination of high deductible isn't their determination. It has to be a qualified plan. The second thing is that you cannot. Have any other medical coverage really that is in place. So that has to be your first line of defense. You can't be enrolled in Medicare at. The time and you cannot be claimed. As a dependent on someone else's tax. So those are the basic criteria that come into play with an HSA account. Now, I have said repeatedly that an HSA is one of the most powerful accounts that you can use to invest if you qualify for it. And it is because it's triple tax advantaged. In other words, you have the ability. To get a couple of different tax benefits from it over a period of time. And when you use an HSA account, the way I'm going to explain here, you're going to see how powerful this can actually be. So let's just jump back down to. The slides and let's just look at what that looks like going forward. So the power of the HSA, the first thing, number one, is that you actually can take a tax deduction for your contributions to the HSA. Right? Now, you can put$7,750 away in an HSA plan if you're a family. Married, filing joint, or 38 50 if it were an individual, if you will. Okay? So you can put 4000 to almost $8,000 into a plan and take a. Tax deduction for it. Now, here's the other side of that. So that's the first element that's really powerful. The second element is that you can invest the money. So now you're going to put the. Money in the plan, and then inside. The plan, you're going to invest it just like a Roth, just like an IRA, just like a brokerage account. You're going to put in ETFs. You're going to put it in index funds. You can put it in whatever investments that they allow you to do. So you invest it. And the beautiful thing is that the assets in the plan will grow tax free. Now, most of the time, most plans. Will only allow you to invest the. Amount in the plan less $1,000. So what they want to do is. Make sure that you have liquidity in. The account should you need it, to reimburse yourself for medical expenses. The third aspect of this is that. Once it's invested, you also have the opportunity to then withdraw the money from the plan tax free for medical expenses. So it can be to pay deductibles. And other qualified medical expenses. You go see the doctor, you have to go through a surgery. And then there are medical expenses. You can take those receipts and you say, hey, I just spent $1,000 on medical expenses, and the plan will write the check or you will be able. To reimburse yourself from the plan and. That money is tax free. So tax deduction on the inside, you invest it, it grows. If you have medical expenses, you can take it out and it's completely tax free. Now, here's how I'm going to tell. You to use this though, because this is really important with my clients that have the cash flow and the ability to do this. The way I have them do it is I want you to go into the plan. So in other words, if we look at it, you have the HSA plan. Here. So you have the HSA account. Okay, and you put dollars in, and. Then you have medical expenses over here, okay? So you have some medical expenses that come into play that you have to pay. What we try to do is we try to get our clients to pay. The medical expenses out of pocket. In other words, they don't raid the HSA account. Why do we do that? Here's the reason why. When we do this right, okay? What you end up with is a. Situation where we take the money in the HSA account, we invest it, and we allow that money to grow over time. See, because the way the IRS has said this, they've never said that you actually have to reimburse yourself real time. It doesn't mean that if you incur a medical expense in one year, you have to take it in that year. So you can save the receipts. So you can save all your medical receipts. And what we have them do is save them in digital files year by year. And so you keep all those receipts. You can keep them for a decade, a decade or more, and you keep. Putting money in the HSA. You pay the medical expenses out of pocket, and you allow the invested HSA account to grow. Now, some of you might sit back. And go, Why would I do that? Why do I want to get into an HSA account, put money into there for the purpose of paying medical expenses. And then not use it for what. It'S there to do. Watch what happens when you do this, right? All right? Because there's this fourth piece of the HSA account that's really important, too, is that in the end, when you turn 65, it actually allows you to effectively convert it to an IRA. You can treat it like an IRA because here's what's going to happen. If you take money out of the HSA account that isn't used for qualified. Medical expenses, then you're going to pay tax and a penalty on it. But after age 65, if you take it out of the HSA account for. Something other than medical expenses, then it's. Treated just like an IRA. There's no penalty, but you pay the tax on it. Why is this so important? Well, let's run some numbers, okay? Because this is going to be mind boggling and eye opening for, all right? Because here's why this becomes really powerful. So if you just assume that you're. Going to put the max away,$7,750 away into the HSA account for a family, okay? And let's say I do that for ten years, and we assume that that number, the annual contribution, doesn't change. So over ten years, you're going to put $77,500 away. Now, let's assume you get an average 8% rate of return over that ten. Year period on the money you put. In the HSA account. In other words, you're going to invest it. You get 8% return, any medical expenses. You pay out of pocket, by the. Time that you finish the ten years of funding it, you will have put.$77,500 away, but it will have grown to$118,153. In other words, you would have made an additional$40,000, almost $41,000 on it. You would have had a 34% increase. Or growth on that account. Now, here's the beautiful thing. You put in 77. At the end of ten years, it's worth 118. If you need to take money out, say, to pay $10,000 in expenses, you take it out. You still have 108. But here's the thing that I want. You to do, is I want you. To then just leave it. You fund it for ten years. You don't touch it for another ten years. That$118,000. After another ten years, you don't put another dime in invested. 8% turns into$255,000. That means that you put in 77,000, and now it's 255. You made $177,000 on it. Okay? 69% of the account is from growth. That's the power of this account. Now, remember, at age 65 now, that can be treated like an IRA. You've got another quarter million dollar IRA that can be used for medical expenses. Now, here's the beautiful thing. If down the road, you say that you have funded it and you want to do a remodel on the house, and you need $30,000 to do it, you have all those receipts you saved. You pull all $30,000 worth of medical receipts from the years before, and you then pull the money out of the account tax free to do whatever you want to do because you saved the receipts. It's a beautiful thing. It's such a great way to do it if it applies. Now, here, let's take this one step further. I'm hoping you're starting to see the value of this. Let's take this one step further. Instead of leaving it invested for ten. Years, after you fund it for ten. Let'S say you leave it for 15 years, just five years more. Five years more. What happens then? Okay, what happens then is watch. All of a sudden, that 255 goes up to$374,000. It goes up almost 50% more. In other words, you fund it with 77,000. You grow by almost $300,000 over that time, okay? That's why this account is so powerful. That's why I love this account as one of the vehicles. If it applies to you, if a high deductible plan makes sense for you, then you may want to look at using a high deductible plan with an HSA. And Kevin, I'm so glad that you asked this question, because it's really a powerful thing to do. Can you overfund an HSA? I don't think so. It just becomes part of your investing and your wealth down the road. Now, if you're going into debt and you have other things that you can't make ends meet, we got to have a different conversation. But the bottom line is that this. Account is something that you can use. As an additional investment and retirement plan going forward because of your ability to access the account. Just like an IRA after age 65 and your ability to invest it and. Allow it to grow during the time and then just save the receipts for medical expenses to reimburse yourself down the road. All right, now, Kevin, you asked a second little piece of this, so I want to make sure that we answer that question to at least at some level, and I'm going to go deeper on another episode for it, but yes. Should you prioritize the HSA over a Roth? Okay, now, this is a nuanced element. In the sense that they're different. Obviously, a Roth is something that you don't get a tax deduction for. A Roth is a different kind of. Retirement account that actually you're limited. You can only put 6500 in there, depending on your age. It can be 7500. It's not tax deductible, but there's the income limits. If your income is above a certain amount and you cannot get and you can't contribute because your income is above the threshold, then you may not qualify for doing it. So should you prioritize an HSA over. Roth is a nuanced question, then I think that you look at it and. Say, is it possible to do both? The power of the HSA is that it's triple tax advantaged and that you. Have the ability to grow and you. Have the ability to convert it and use it like an IRA at age 65. If you're in a high a lower. Tax bracket, though, the power of the Roth is that you put money in. You don't get a tax deduction for. It if you qualify, and that will. Grow 100% tax free. And when you take it out down. The road, it is 100% tax free. No matter what it has grown to, because it's a Roth account. So they're two different accounts. And if you have the ability to. Do both of them, if you qualify. For both of them, I'd look at. It and say, how can I do both? Because they have two different operations. They do things differently. One is completely tax free forever. The other one is tax free for medical expenses, and you get a tax deduction, but it also operates as an. IRA at age 65. So I hope that this helps. I hope that this gave you a little bit of an understanding of what to do. The power of an HSA. If you have not explored HSA and you're healthy and you don't have a lot of medical expenses, and you want to save money on your medical premiums, your health insurance premiums, and also invest and grow it at the same time, you might want to check out the HSA because it's a powerful, powerful account. If it applies to you. I hope you found this of value. I hope that this was helpful, and. I look forward to answering more of your questions. Make sure that you keep them coming your way, my way, so I can get the answers. Coming your way to help you out down the road. Because our job here is to light. The path to financial freedom, for you. To break it down, hopefully give you a simple way to look at it, give you the pathway to make it happen. There's no bias here. I'm not selling insurance. I'm not selling investments. I'm simply selling you on the possibility of your dreams. All right? So let's do that. All right? In the meantime, until I get to. See you or talk to you on another episode of the affluent entrepreneur show, or see you on the road as I'm speaking and doing the things that I get to do and I'm gifted and blessed to do, always, always strive to live a life that outlives you. Thank you for listening to the affluent entrepreneur show. With me. Your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the affluent entrepreneur facebook group now by going to melabraham.com/group, and I'll see you there.