Matt Nelson  0:00  
HSAs are some of the best retirement vehicles out there, we think for tax free growth. But can you really stockpile all of the money you put in an HSA and just plan to spend it later? We're going to analyze this today, how you go about doing that, and then what the risks are. So make sure to stay to the end to see what the biggest couple of risks are if you do this.

Hi, I'm Matt Nelson, and I've been helping clients retire for over 25 years with perspective six group, and we set up this channel so that we could share what's working and help med tech professionals make smarter decisions with their money. So I've got Jacob back with me today, and we're going to tackle another financial planning and tax related question. So a common planning question we get from clients is, how do you make use of your HSA plan? They might, you know, they might have this great HSA plan through work. And the thing we see is, is that they're putting in the maximum, but then they're right away spending it. By the end of the year, they're spending most of it, or, you know, maybe worse yet, it's they're, they're not, maybe not quite worse yet, but not so great is they're leaving the balance, but it's sitting in the cash account, earning nothing.

So really, what we're trying to answer today is, you know, can you just max out your HSA every year without pulling any money off for medical expenses? Is there anything wrong with that? And then if you do so, would that mean that you're going to build up this huge balance that would be great to spend tax for you out of retirement. But what if you don't? What's the, what's the kind of ramifications? So why don't, first of all, Jake, why don't you just, like, review how the HSA plan works, and we'll go from there. Yep. Let's

Jacob LaRue  1:52  
go into the basics HSA. So lot of people, like you said, might use them, but not really understand what they're what they're doing. So when you put money in an HSA, you're getting a tax deduction right away that year for 2025 if you're on a family plan, you could put up to $8,550 and then you get an extra $1,000 if you're over 55 so that's quite a bit of money that you can stash away into these HSAs every year. And then once that money's in there, like I said, you get a tax deduction on the front end, and then it sits there, and it can grow tax free. You know, you can leave it there for as long as you want. We'll talk about that here in a little bit. But you can also invest your HSA dollars just like you would your foreign K we'll also hit on that a little more to to optimize it. Yeah, so, so, tax deduction, tax free, growth. Go ahead.

Matt Nelson  2:47  
Yeah, right. No, I was just taking the words right out of your mouth there, yeah, the tax deduction on the front end. And then, you know, the biggest advantage of the of the HSA is that if you pull it out for medical expenses, it's tax free. So very similar to an IRA in that way, that you're accumulating money on a tax deferred basis. But the difference is, it's all tax free for medical so it's kind of like a medical Roth,

Jacob LaRue  3:13  
in a way. I love that, that analogy, and, yeah, think of your Roth IRA, but for medical expenses, that's a that's a good one. So the, so, the kind

Matt Nelson  3:22  
of, the point is, can you really stockpile the money and just, you know, look at it later. And if you did, like, how big could that get? I think you ran right before the show, you were running some numbers. What'd you come up with there?

Jacob LaRue  3:35  
Yeah, so, yes, you can definitely stockpile it. Like I said. I mean, you can let this money accumulate through your working years into retirement. But that might not be the best thing, because it might get so big that you might never spend it all. So you know, on a 30 year period, let's say you're age 30, and you just started Maxing your your HSA out every year for 30 years until you're 60, if that account only earn 5% your balance at the end of those 30 years is going to be over $500,000 let's say that account grew 7% which very well could happen. You might have over $750,000 that's a lot of money that you have to come up with medical expenses for, which is kind of one of one of the risks that we'll talk

Matt Nelson  4:21  
about, right? Yeah, it's like a catch 22 like, that's fantastic that all that money could be tax free. But okay, so the kind of, the kind of the ideas you mentioned investing them, so, you know, should you invest them? Or just, you know, leave it in the cash account? Well, you know, these plans, typically, if you're familiar with them, they default to a cash balance, which is basically like a bank account, but you then can often push, push an amount over, typically $1,000 minimum, out to more of a brokerage account, or there's maybe a lineup of investments, just like there would be in your 401 k plan. And then. Can invest it in stocks or, you know, stock funds usually use each mutual funds, bond funds, etc. So, you know, we recommend being relatively aggressive. I think that's okay, as long as, as long as you've got enough available to cover your deductible, and you're not needing to access that. Because, again, going back to the idea of, we're going to let the stockpile, hopefully you're paying the medical expenses out of pocket. So yeah, being aggressive is probably okay.

Jacob LaRue  5:28  
And you know, a lot of people think, Oh, I'm retired, I'm going to be spending this money right away. Well, if you, if you've been contributing to HSA for a while, you'll probably have a big balance, and you're probably not going to spend all of it in one year. So leaving it invested even in retirement is okay to do, yes,

Matt Nelson  5:45  
right? And then we can treat it a lot like we do with clients on just their retirement income, whereas we get closer to the point we might spend some money from that account maybe in retirement, we could start estimating the amount of medical expenses that might be there over the next, let's say, five years, and then start carving back and setting that aside in a in a bucket that would be less aggressive, and then use those for medical expenses, if, if that's the plan. So, all right, what? What would you actually spend this money on? If you did accumulate, and it got to be a $750,000 account, and now your age, you know, 65 what's typical expenditures? Yeah,

Jacob LaRue  6:27  
the first one that most people are going to have is Medicare premiums. So that's, that's kind of the main one people think of when they think of HSA and retirement is pulling it out, sending it to your Medicare to pay your premiums every month, which is great some other things like long term care premiums, or even long term care costs. You can spend your HSA for those types of expenses, and then any other thing you know, whether it's a prescription drug or surgeries that you come you know, have to go to the hospital for whatever you know, there's a long list of qualified medical expenses that you can spend your HSA dollars on, right

Matt Nelson  7:03  
and including, I don't know if we added this to notes, but you know, really, you need to keep track of all your receipts all the way up to retirement. As long as you have a receipt that was never reimbursed, there's, there's no real time limit there on being able to reimburse for that receipt. And so if you're doing this correctly, if you're going to stockpile your HSA for years, then you got to stockpile your receipts for years. That is one of the risks. I mean, it's, it is? It's not like we need an, everybody needs another, you know, bookkeeping item to keep track of. But keep the big ones, you know, keep them in your, you know, in some sort of digital file, and they should be available for those of you that haven't, though, stockpiled all your receipts. For the most part, if you add up those Medicare premiums, long term care premiums, it's going to be a pretty substantial sum anyway, and I think most people will probably have enough expenses to offset. I guess that that kind of brings us to, sort of our fifth point here is, you know what the risks are if they're if you leave your balance untouched. So is there? How would you start to address that?

Jacob LaRue  8:15  
Yeah, I think, like you said, most people aren't ever going to have a balance that is going to be too big to spend, unless you are in that. You know, rare scenario where you've just been maxing it out. Have always had access to an HSA for 3040, plus years. The biggest risk, though, like I think, is when you are not investing those dollars, that's a pretty big risk. But if you do max it out every year for 20, 3040, years, now you are at risk to maybe having too much in an HSA, and that's going to be less beneficial, because now, if you went to spend that money just for you know, let's say you went to the grocery store and you drain your IRA already? Well, you can use your HSA, but that's going to be taxable now, and it's not going to be tax free. So if you fund too much where your Medicare premiums and long term care costs are still below that, that account balance, that's a big risk. And then furthermore, you know, probably the bigger one is, let's say you had an early death event where you really didn't spend any of your HSA and you didn't have a spouse that survived you, those HSA dollars are going to go to your kids, and they have to spend it all within one year. That's a way different scenario than if they inherited an IRA. They're not going to probably have enough medical expense that one year to drain an HSA most tax efficiently. So then a lot of that money is going to be taxable to them, and that's that's going to eat away at, you know, could be half the balance if, if they have to pull $300,000 in one year, that's easy, 35 40% in taxes. Yes,

Matt Nelson  10:00  
exactly. So it's a it's a bit of a catch 22 that they these HSA plans are, frankly, one of the best vehicles you have to save for retirement because that, that triple tax free nature, where you get a deduction on the front end, you grow a tax deferred and it's spent for medical is tax free. That is fantastic. Nothing else can beat that. However, the downside is, if you don't spend it before you die, there are some risks that that money is maybe even tax I shouldn't say less favorably, but causes more problems for for errors than it would in a normal account, and say, like a Roth IRA, I think it's, I still think it's probably worth the risk for most people, you know, a lot of the clients that we're working with, you know, yes, maybe we are getting them early enough that they can start maxing out their balances and have a full 30 years to invest. But for the most part, you know, by the time we're able to do that, and you have enough cash flow to pay your medical expenses out of pocket, and you can leave your HSA alone, you're in the higher earning brackets. Your kids are probably past the, you know, the constantly sick zone. And you know, we're going to accumulate a sizable HSA balance, but we're not going to, we're not going to have a million dollars in there, typically. And if we, if we're gonna have a balance in the sort of 250, to 500 range, I think for most people, they're gonna spend that on Medicare premiums, long term care expenses and so forth. But just keep in mind, the biggest item is, if you're gonna stockpile, keep your receipts. Make sure that they're ready to go as soon as you hit retirement, or maybe high maybe, maybe years where you need some income, but you already have a high income bracket, maybe you could tap into your HSA, if it's a large enough balance, then for some tax free nature, that's

Jacob LaRue  11:58  
a really good point. The reimbursement part of it was like no time horizon is, is a really key one to keep in mind and just store in your back pocket. So,

Matt Nelson  12:07  
yep, well, let's leave it for let's leave it there. It's all the time we have. But, you know, I think we kind of kind of answered the question, it's definitely you can stockpile it, and it's, it's worth it, but there are some risks we'll link to in the show notes below, a resource we have about how to how to evaluate your HSA plan. And if you want any second opinion, certainly give us a call and check out our website at perspective six group.com and until next time, remember, financial freedom takes more than money. So find your purpose and make a plan to live your life well, take care of each other out there you.

Transcribed by https://otter.ai