Learn to Maximize Your Health Savings Account with Expert Guest Rizek Housari

Welcome to today's episode. I'm excited to bring Rizk Hussari back to the podcast. Um, we heard from him back early in the episodes where he talked about questions to ask your financial advisor, how to work effectively with one, how to choose one and all of that. So go find his previous episode. But today we are going to be talking about savings and most Specifically the health savings account. So before we dive in Rizk, thank you for joining us. And if you want to share just a little bit about who you are and what you do. Yeah, thanks for having me. So I'm a wealth advisor, certified financial planner and CPA, and I help families make smart decisions with their money, think through tax strategies as it pertains to their investments, retirement. Help answer questions like, when can I retire? When's the best time to take social security? If I'm taking care of a loved one who needs my assistance, what are the things that I can do today to help either put them in a stronger position in the future, or just make sure that. I'm setting boundaries. There's a lot that that we help answer and I love helping people, educating them and making sure that they understand all the different options that are out there. Because as you're well aware, personal finance is its own language and sometimes you need a dictionary or someone to kind of coach you through that. Yes. Yes. And definitely getting people on your side and helping educate you to make those wise decisions. So that's why I asked you to come talk about health savings account. I know you tout this over on tech talk quite a bit, and I just thought what a great place, another area to talk about savings. You know, we have all these savings account, retirement savings account, whatever you want to call them. And so specifically let's dive into those. So can you explain to our listeners. What is a health savings account and how does it differ from other savings or investment accounts? Absolutely. Oh, there's, there's so much to unpack there. A health savings account is an account that's been around for a number of years now and it was originally designed For individuals who had a high deductible health insurance plan, who were now paying less in monthly premiums to be able to set aside money so that when they did have an emergency or medical event come up, they could then tap on this account to use for a qualifying expense, a deductible, a copay, something like that. The health savings account is a great place to save for individuals who have a the eligibility, who have a qualifying high deductible health insurance plan, because you really get the triple whammy in terms of tax savings. It's a tax deductible contribution going in, then it's tax free growth. While it's in the account, assuming you invested or if you just leave it as cash, you might get a few pennies in interest from time to time. And then when you take the money out, if you use it for a qualifying medical expense, you're able to do that tax free. So it's really powerful that way. And in fact. There's actually a fourth tax benefit that oftentimes doesn't get brought up, but it's just as impactful if you make contributions through your employer. So through payroll, oftentimes you can avoid FICA taxes on those dollars and FICA, that's Medicare and Social Security tax. So it's additional savings of roughly seven and a half percent on the money that you put into the HSA. It's really powerful. Remind me what the second question was. Yes. How does it differ from savings or investment accounts? Gotcha. Okay. So, from, you know, a regular investment account, like if you're going to use a brokerage account or, you know, something else. With those accounts, it's unlimited. You can put as much or as little in as you want, you can take it out whenever you want, and you pay taxes whenever you sell an investment at a gain or it spits off dividends and interest. With an HSA, it functions much more like a retirement account that you may be familiar with, like an IRA for example, where once the money is in that account, you can buy and sell as often as you want, and the growth is deferred into the future. This really brings all the benefits of a deductible IRA and a Roth IRA. It's, there's really no account out there like it when it comes to the HSA because you get a tax deduction coming in, tax free growth, and then tax free coming out. You can invest in an HSA the same way you could in an IRA or a Roth IRA. Another brokerage account. You can invest in stocks, bonds, mutual funds, index funds, the list goes on. I actually know someone who's investing in a ranch in Idaho. That's maybe a conversation for another day. Most people won't end up doing that, but at the end of the day, having an HSA allows you a lot of flexibility because it can be used for a number of expenses and When set up and planned for in the right way offers you a lot of flexibility and opportunity. For example, what most people do with their HSA is they put money into the account, typically through payroll, and then they have that debit card associated with their HSA account. And when they go to the doctor, they go to the dentist, and they have a copay or deductible, they'll whip out that debit card and swipe it. Certainly there's some tax benefits that they're taking advantage of that way, because it's better to do that Then to not put the money into an HSA and just pay cash out of pocket that way. So I, I'll give a little bit of grace that, you know, that's a good place to start. And for most people, that's really where it is. They don't take advantage of investing the money inside of their HSA account, which I think is to their detriment. Now having a health savings account and investing it, we need, we kind of need to have our ducks in a row, if you will, we want to be sure we have our bases covered where you have an emergency fund outside of the HSA, such that if you did have a medical emergency come up, you could pay cash out of pocket and you wouldn't have to tap your HSA. If you're not at that point yet, it certainly makes sense not to. To invest your HSA, but once you're in a solid financial position, then you may want to consider investing your HSA. Now the question is, how should we invest it? And certainly a financial plan would help to address a lot of that in connection with how you're investing. Maybe you're a 401k or a 457, or if you're going to have a pension when you retire, that could slightly change the way that we look at this. But in essence, if you allow the money in your HSA to grow, By investing it. And as you have medical expenses come up, you pay cash out of pocket for it. You can actually hold onto those receipts and reimburse yourself years in the future for those medical expenses that you had while you were covered by a high deductible health insurance plan and had an HSA in place. This is the foundational piece of retirement planning, because if we have this source of tax free cash flow available to us in those critical retirement years, when we're trying to keep our Medicare premiums low, we're trying to maximize the amount of Social Security that we can get, which are both directly impacted by the amount of taxable income that we have when we're retired. This allows us just another lever to pull on to get a source of cash flow that's completely tax free by reimbursing ourselves. And it gets even better because when you turn 65, you can actually take the money out of your HSA and it's treated just like you. A distribution from a traditional IRA or 401k, you still have to pay the tax on it from an income perspective at the federal and depending on where you live the state level as well. But you can avoid the 20 percent penalty. If you were to take the money out of the HSA. Before you were 65 and it was used for a non medical expense. Maybe you take your family on a cruise or something. Not only are you going to face income taxes, but you're going to be hit with a 20 percent penalty from the IRS. So that's something to look out for. Yeah. Yeah. It's, it's important to remember all these little snippets of our different accounts for sure. So are there any limits? Or other guidelines that we should know as far as contributing and withdrawing and all of that. Absolutely, there are. Anytime there's a really great tax benefit on the table, you can just about bet your bottom dollar that there's going to be limits and restrictions on who's eligible to make contributions and how much they can put in. The more in my mind, the more restrictive the contribution amount, the better the tax benefit. And that certainly applies here of all the IRAs and 401ks and other investment type accounts that are out there that have tax benefits associated with them. By far, the HSA is the most restrictive. Right now in 2024, it's roughly 4, 000 if you're covered by a single plan, or if you're on a family health insurance plan, it's double that. For every individual that's over the age of 55, So a little bit different here than IRAs and 401ks, which are 50, but for whatever reason they made it 55, you're able to get an extra thousand. So for a couple who's both, let's say in their late 50s, they're eligible to put in up to 10, 000 roughly. Now, those aren't the exact numbers, but you're in the ballpark there. And that can be really strategic if you're trying to get a tax deduction today, and you know that you're ultimately going to use that money in the future. Whether it's to pay for your Medicare Part B premiums down the road or other expenses that you're most certainly likely to have. One area where I see people make a mistake is that they think, oh yeah, my deductible is high, or you know what, my deductible is not as high as what I think my neighbor or family members is. It's not high relative to your experience, but rather what the IRS deems high. And there's actually a range, for whatever reason, there's actually a bottom. Range and a top range when it comes to be making when it comes to making HSA contributions. So if your deductibles actually too high, and I just met with a woman yesterday, who's deductible actually exceeded the limit. She's no longer eligible to be making a contribution to the HSA in that year. So you can go and look the IRS publishes tables on where that ranges and maximum out of pocket costs as well. Assuming you qualify for an HSA, then wonderful, you've got the green light to make contributions. One other area I see people often kind of make a mistake and maybe rob themselves from taking advantage of this tax and investment strategy by using HSA is thinking that because their employer doesn't offer a health savings account as part of their benefits package that they're not eligible. To make contributions to their age to say, let's be clear here. This is not like the 401k with the 401k or four or three B, or many other types of retirement plans that are offered. Your employer has to have the plan open, sponsor it and allow you to be eligible to make contributions. But with the age to say. As long as you check the boxes with a qualifying high deductible health insurance plan, you can go and open up an HSA. In fact, if your employer even offers you one, and you're not thrilled with the investment options, or the fees are high, or maybe they don't even allow you to invest inside the HSA. There's actually many HSA providers out there that don't allow you to invest or that force you to keep a certain dollar amount. In cash before you can invest, which don't get me started on that. Maybe we'll talk about that later. Then you can go and find one out with a discount brokerage firm or whoever. And we use Fidelity, they offer them. And, you know, that could be a great option for you to continue to save, get the tax benefits and have more control over your money growing for you. Yeah, I love it. And you know, before we jumped on, I shared with you that I didn't even know what you could invest your money within this. It was new. Obviously, this is fairly new. So as I was working, it was a new introduction. Same as with the Roth, I've talked about that before. Like, All these new things and I'm trying to digest all of this information. And so I'm like, okay, I'm taking advantage of it. Cause I knew, you know, it is tax free. This is reducing my tax liability. I knew that. And I just jumped on board and use that, you know, and I was grateful that it was different than an FSA. You know, because I didn't have to spend it by the end of that year, so it gave me greater, you know, ability to save ahead for any potential medical emergency, you know, and I loved that. So think if people can think about it in that respect first, is this is protect you in a medical emergency in the future, being able to make those medical bill payments more easily, but also protecting you tax wise now. And then the third piece, which is really why we have Risa gone here is to talk about that investing piece. And once you get to a certain level, and the two co workers who brought it to my attention, and right before I was retiring, I was like, Oh, my gosh, the one said, I just keep out enough. So it wasn't any. You know, anything stated from our employer, she just says, I keep enough in there to cover what she normally spends in the year with her kids. They're very active dirt bike riders, you know, sports players. And so she's like, we have our little bit of mishaps. I just keep my cash ready. And then I invest the rest of it. And so that was really amazing to me. So as an individual who has an HSA has just heard us talk and they're like, there was an investment portion. How do they go about exploring that? Number one. And then number two, I know you said sometimes it may not be, you know, the best choice and they could go somewhere else. How do they evaluate that for themselves? Yeah, what a good question. So for starters, most people who start investing in HSA by far are going to use an employer sponsored health savings account. And so the first thing you want to see is, is the provider, is the financial institution that your employer picked, And we won't get into the conversation around, you know, some of the incentives or conflicts of interest that are there, but is that financial institution even offering the ability for you to invest some don't all you can do is save it's it's as cash and it may earn a little bit of interest. There's two big providers in the HSA space. By far these two names dominate most HSA plans and it's about a 90 percent shot that if you have an HSA it's going to fall under one of these two providers. They require you to keep a thousand dollars if you're on a single plan or two thousand dollars if you're on a family plan. In cash now between you and me, the reason they do that is because they are an interest on the cash balance that you have saved. They're investing that themselves. That's one way among many that they make money, but not all providers do. For example, like I mentioned, fidelity as one example, they're not the only one. There's many others. Then once you have that amount of cash, there's going to be an investment lineup that you could pick from. Now, this is something that your employer may have chosen or The HSA plan provider may have picked a list of, let's call it 20 different mutual funds that you can choose from. It's going to look very, very similar to maybe your 401k lineup that you have available to you. So it's going to have some stock options, bonds, maybe it has some target date funds that you can pick from. There's going to be actively managed. Hopefully there's some passively low cost index fund options as well. And then you can pick and choose how you want to invest them. It's going to look very, very similar to how you would allocate your 401k. And then you can go from there. If you get to the point where either you don't like the investment options that you're. HSA provider has that's connected with your employer. You can once per year roll over the assets from that HSA custodian to an HSA provider that you like while you're still employed with your employer. So unlike a 401k where you have to separate from service or quit, get fired, something like that, you can do that with an HSA once per year, even if you're still employed, that might be a good way for you to continue to get the FICA tax savings. Remember that Social Security and Medicare tax through payroll. And from time to time, pick and choose your own investments. Now, maybe you leave your employer and you don't like to keep your HSA there and you're saying, you know what, while I'm rolling my 401k out, I might as well do the HSA at the same time. Certainly you could do that then as well too. And you can have multiple HSA accounts just like you can with IRAs or 401ks. The contribution limit is capped in aggregation, meaning if you had two HSAs, you can't hit the limit on both. It'd be one limit across all accounts. Oh, man, that sounds, yeah, and very easy, great for, um, all your listeners to go explore with your employers, you know, if you're coming up on open enrollment right now, which I know some of you have fiscal years July to June, that may be happening, um, if not, it'll be towards the end of the year, go explore that and ask that. So, are there any common misconceptions or pitfalls they should be aware of? I know we mentioned one earlier, but talk about a few more of those and more specifically. Absolutely. The most common pitfall is spending the money in your HSA before giving it time to grow by far. That's the most common, but assuming you've checked the box on that one, the next would be not understanding that you can invest it the same way you can your retirement funds, most people. Are ultra conservative when they invest the money in their HSA. And I understand that when you're starting out, because you've been trained throughout your life to think of your health savings account as an emergency fund. And when you're starting out on your personal finance journey, that's totally fair and certainly very appropriate. But eventually you'll graduate where you've got enough cash built up and you've got an emergency fund outside of the HSA where you want to actually now take full advantage of the tax efficiency within that account. There should be nothing holding you back from investing it as aggressively or even more. aggressively than your 401k. Now, when I say the words aggressively, sometimes people get nervous. They think we're gambling with the stock market, or maybe they've just had a bad experience with investing to begin with. We're not talking about, you know, putting it all in crypto. Okay, that's not what we're saying. We're just saying there are some Accounts that are more designed from a tax and retirement planning perspective to hold more growth oriented assets. And there are some accounts to hold more conservative assets. For example, typically, we hold pre tax retirement accounts, like 401ks and IRAs have more Slightly more conservative investment mix that might mean more bonds or more fixed income type products that don't fluctuate in price as much as more growth oriented assets like stocks or equities, for example, and so Roth accounts. We would categorize as being tax free. The growth is tax free within this account. The HSA sits as well. It's also a tax free account. And in many instances we think of Roth and HSA the same way. They may hold more of your aggressive investments. So sometimes people just say, Oh, I'm just, you know, I'm going to choose the target date 2040 or 2045 fund for my 401k and my Roth IRA and my HSA. That's fine. And I, and I understand if you're kind of doing it yourself, you know, that's an easy, like, not a lot of headache option to go. And certainly that can make a lot of sense. But if you're trying to take your game to the next level, it might make sense to do a little bit of planning here. Always keeping in the back of your mind, the tax efficiency. Another common mistake I see. Is people not holding on to receipts? Now, you don't actually have to keep a physical receipt. You can snap a picture of a bill that you've paid for medical expenses. Let me give you an example. Let's say I have a qualifying high deductible health insurance plan today, and I open up an HSA account. Tomorrow, I have a medical emergency. And I need 3, 000 to hit my deductible. I can pay 3, 000 from my high yield savings account or emergency fund or whatever I have cash. I can hold on to that receipt that I've paid. Then years in the future, whenever I want, there's no expiration on this, I can go back and reimburse myself for those dollars that I spent. Out of pocket that's a really important 1 to hold on to those receipts in the event that the IRS comes knocking. You just want to have evidence to support that. This was an eligible distribution. That's not subject to income tax and not subject to a penalty. That's 1 thing where I see people kind of make a mistake. And I think a 3rd, 1 that. Maybe less, less often, but no less should be reviewed and considered is how the HSA is inherited. When you get towards the end of your life, you're willing to retirement. And if you decide, you know what, I want to leave a legacy behind to my kids, maybe my grandkids. There are certain accounts that lend themselves better to inheriting versus you spending and drawing down on when you're retired. Roth IRAs are among the best assets to give to children from an income tax perspective, along with brokerage account assets, which get what we call a step up in basis. And I won't nerd out too much. This may be my CPA side coming out. So thanks for forgiving me here. But those are some of the best assets to leave behind. Traditional IRA assets and health savings account assets are some of the best to spend while you're still living. All else being equal. Now, it's not always the case, but typically we don't like to leave HSA money behind. And in most cases, we actually will burn through the HSA money in your late 60s or early 70s, either by reimbursing yourself for prior years, medical expenses, or, you know, as you get older, I don't have to tell you more of your money will go towards health care. This can be advantageous if we're doing things like Roth conversions. Transcribed By trying to keep our income tax low in the future, or trying to maximize the amount we take for Social Security, or minimize the premiums we pay for Medicare. Ah, very good. Awesome. So much good information. Is there anything that we haven't covered that you would like to say before we finish off? Yes, go check your beneficiary designations. It's important for you, like with other bank accounts, retirement accounts, and life insurance maybe, to make sure that they're up to date and current. If you've done a trust, will, or other estate planning, please take some time to make sure that your trust is fully funded. And one way you do that is to make sure that your beneficiary designations are current. If you or a child has gone through a divorce or is likely to go through a divorce in the future, there's some estate planning we'll want to consider as well. Awesome. Thank you so much for all of your wisdom and information and listeners. And if you didn't get his first episode, go find that one as well. And we will see you next week. Thanks for listening. Every week, my goal is to help you get one step closer to financial freedom and making confident decisions so your money starts working for you. Having a community of support is important to your financial success. I would love to have you join me in my free Facebook community, All Things Personal Finance. Inside this group, every live training, action challenge, and posts are filled with tips, And strategies to help you progress to financial freedom. If you have questions from today's episode or want to learn more, follow me on Instagram at Elevate Finances. If you're looking for personalized support to get your finances on track, check out my website at elevatefinances. us to learn more about how I can support you with one on one coaching. Thanks and have a wonderful day.