Speaker 0 00:00:02 <inaudible>
Speaker 1 00:00:08 What's up, everyone. Welcome to the finance for physicians podcast. I'm your host, Daniel Raimi. Join me as we dig into what it looks like for physicians to begin using their finances as a tool to live better lives. You can learn more about our
[email protected] let's. Jump into today's episode. What's up guys. Hope you're having a great day today. We're going to talk a HSA. So health savings account. I know probably you've heard of that before, but, uh, today we're going to be talking about how it's, what I would consider one of the best tax shelters that exists. I would call it even a hidden gym because so few people are utilizing it. Uh, so today we're going to be talking about why that's the case and how they work and, uh, you know, how you decide whether or not that's a good fit for your situation.
Speaker 1 00:00:56 And then talk about, you know, the ways to manage this over time to maximize its efficiency. So if you're not, uh, you're not completely aware of how the HSA works, or maybe you're not sure of how to, uh, manage this over time, or maybe you've never even heard of it as being a, a wealth building tool in the first place. You're definitely going to benefit from listening in today. So what I've found in my experience as a financial planner and getting to see people's finances is that a lot of people are not even utilizing the HSA at all. Maybe they don't, they're just not aware of it, or they haven't looked at the numbers, but there's the category of people that are just completely not utilizing it at all. There's another group of people that are, that are utilizing it, but they're not, maybe they're not managing it as efficiently as possible.
Speaker 1 00:01:47 So we're going to be talking about how you can be preferably in the group that is taking advantage of it based on good reasoning. And that is also maximizing the efficiency of it over time. There's a quite a few factors to kind of unpack the decide or to, to start to navigate that sort of process. So we're going to try to unpack some of those today, but I think before we jump into it, I, the big thing I would emphasize is maybe you're thinking of it as just a, you know, health care, uh, short-term spending account, and that it's not going to be very impactful, but I would say it can be hugely impactful. This is probably one of this is I would say the best tax shelter that is existing in, in most work environments, as far as the different options, you have to put your money.
Speaker 1 00:02:34 So I Def, I definitely think it's worthwhile to, uh, take the time and understand how this thing works and, uh, at least to understand those basics. And I think it's going to put you in a good position to start to take advantage of the, you know, the HSA, uh, benefits. So why is it so great or maybe before we get into that, let's talk about exactly what an HSA is. So health savings account, it is a, an account you can gain access to when you in a qualified health insurance plan. So I'll circle back to what that is, as far as the qualified health insurance part, but you have to have a health insurance plan in order to qualify to actually use the HSA account. So it's a separate account. It's like an account in your name or your family's name, and you can put your money into it or through your work plan.
Speaker 1 00:03:26 You can put it in through your payroll. Your employer technically puts it into the HSA plan, but this health savings account is an account. Your dollars go into whether they go in through payroll deduction, through work, or you put your own money into it. And the money in there gets, uh, even invested if you choose to do it that way, and you can build in, build up wealth over time. You don't have to spend it in the year that you put the money in, which is, is a lot of cases, how it works for other types of accounts, like a flex spending account. So this is a health savings accounts. It's different than the other types in that. The big difference is that you don't have to spend it in the year and you can actually leave it in there. And that's where the wealth building component comes in.
Speaker 1 00:04:13 So that's kind of the really high level basics. So why is it so great? The HSA account itself I mentioned is, is a fantastic, uh, tax shelter. It's a hidden gym. So why is it so great? So I've already mentioned one of the key benefits and that is that you can roll over your balance or it's like, you know, you don't have to use the funds. And so you can basically build up as much wealth as you are able to because there's no year by year requirement to take money out. And so that's a big, huge component. That's the only, that's the main reason that it allows you to build up wealth. It also most HSEs allow you to invest those dollars. So that's the second key factor that allows you to build wealth because you can invest in because you're not required to take the money out.
Speaker 1 00:04:59 You can essentially start to stockpile money in there. The third big benefit is the, uh, exceptional tax benefits. So there's a few different factors that kind of combined to make it such a good tax tax sheltered plan. But the first one is that it is pre bike attacks. So FICA tax is social security and Medicare. You have to pay tax to social security and Medicare on income and income, except for HSA contributions or some other types of contributions. So this HSA contribution, if you fund an HSA plan and it's done through payroll, it will be pre FICA. And so that is a, that's a special benefit. Like for example, if you contribute to a 401k through payroll, it is not pre FICA. You are paying social security and Medicare on those contributions. Versus if you fund the HSA, it is pre FICA. So that means you're not paying social security and Medicare on that contribution.
Speaker 1 00:06:02 Now that's not always the case. If you have to fund the HSA out of pocket, you don't get to avoid FICA tax. So you have to end up paying FICA tax on, on it that way. But as long as you run it through payroll and it's set up, uh, in a qualified, uh, they call it a cafeteria plan. But, uh, as long as it's set up correctly through payroll, it should be pre FICA tax. It's also pre federal and state tax most of the time, as well, as long as you run it through your payroll, in the qualified plan, same sort of thing as FICA, it's going to be pre federal tax and pre state income tax, as long as you do it that way. Now, if you have to fund out of pocket, you don't totally miss out on that, but it has to be a deduction.
Speaker 1 00:06:49 So you, if you aren't able to fund it through payroll, you still get to inevitable, eventually excluded from your income, but you have to then report it manually on your tax return when you go to file. So that's a deduction which is different than just being straight up, you know, never being taxed in the first place. So either way you should be able to, uh, avoid, uh, state and federal income tax on it, which is really good. Um, that that's another, the second big tax benefit. The third big tax benefit is over time. It's tax-free growth. As long as it stays in the account, there's no tax on the growth. So that's a, that's a big deal as it grows, no tax fourth, big thing, as long as you withdraw it for healthcare costs, it's tax-free then too. So pre-tax going in. So you avoid tax going in, you avoid tax as it grows, as long as it stays in the plan.
Speaker 1 00:07:47 And then you avoid tax when it comes out, as long as you use it for healthcare qualified healthcare costs. So that's why I say it's the pretty much best tax shelter that you, that you're going to have access to. Assuming you do have access is because it's tax-free. They said sometimes they call triple tax free. So it's, tax-free going in tax-free growth. Tax-free coming out. There's no other plan that's like that. That's like a Roth IRA is after tax going in. So there's no tax benefit on the front end with a Roth, but it's tax free on the backend. So you don't get, it's not near as good of a tax benefit. A Roth IRA is not versus a pre-tax 401k, that's tax beneficial on the front end, but then on the back end, you get texts. So there's really no other wealth building vehicle that is structured that away.
Speaker 1 00:08:35 That allows you to be avoiding tax on both the front end and as it grows and when you take it out. So that's the key part that makes it such a good tax benefit. So the, one of the most common questions people ask is, well, what if I don't use it for healthcare? Or what if I don't have healthcare costs? Well, first of all, if you're young odds are, you're going to have some future healthcare costs to use it on, you know, in old age, you know, for example, long-term care costs, um, that could be an astronomical number. Um, so in a lot of cases, when you're young, there's plenty of future healthcare costs to, uh, earmark against this. And that's always the preferred route to take money out of an HSA, but there could be a scenario where, you know, you have none or you have, um, you're, you're not able to pull it out for healthcare.
Speaker 1 00:09:24 So in that situation, um, it actually functions very similarly to like a normal 401k. So as long as you're 65 years old, you can actually take out of the HSA and it ends up being treated basically just like the 401k would have been. So remember I said, with a traditional 401k, it's, pre-tax going in, so you avoid tax going in tax-free growth, and then it gets taxed when you take it out. So in the situation where you take it out for non-healthcare costs after age 65, it ends up being taxed on the back end, which is basically the same tax streak treatment as the 401k, except the fact that you were able to avoid FICA attacks, assuming you did it through payroll. So that's a slight advantage to the HSA, but essentially in a, um, if you use it for healthcare, it's far better than like the pre-tax 401k.
Speaker 1 00:10:18 And then if you end up in a situation where you can't use it for healthcare, it's still slightly better than the 401k. So quick side note on taxes, HSA is our fantastic tax shelter when you're living, but when you pass away, they can actually become fully taxable. So ideally there's a, there's a little bit of a work around there, or a way to kind of delay that. Um, ideally you spend it before you pass away, or if you're married, you just need to make sure that your spouse is named as the beneficiary. Because as long as your spouse is formally named as the beneficiary, you can extend that to, they can receive that asset and then extended for their lifetime, the really good benefits of HSA. So if you're married, you, you make sure your spouse is named as the beneficiary. And if you haven't set up that way, you should be able to realize the great benefits of tax sheltered HSA for the later of you or your spouse's lifetime.
Speaker 1 00:11:18 So they're in the straightforward situation where you have access already to the HSA. So your underlying health care plan is qualified for an HSA. And so you already essentially have access to it. That's straightforward. That's going to be, you know, no brainer max out the HSA. If you have the dollars, you, you definitely want to maximize it. It's a great tool. And you want to build that account up as much as you can. So that's very straightforward, I think is if you have access, it's definitely a good thing to maximize that HSA plan maximum for family this year is in 2021, is this recording maximum for a family is 7,200 for the year. Um, but not everybody has access to an HSA, or maybe you have a choice of plans, one that does have access and one that doesn't. So how do you gain access?
Speaker 1 00:12:08 I already mentioned you must have a qualified health insurance plan. So that's the key, the golden ticket there is you've got to have that health insurance plan it's and typically it's a higher deductible health insurance plan that there's a deductible minimum. It has to be above at or above this level so that you can gain access to the HSA. Your H your health insurance plans should mention whether or not it is qualified. An HSA qualified plan is you have to look at those choices and take that into consideration. So some companies, I would say most companies offer at least one choice of health insurance that is HSA qualified. Some of them have even more than one HSA qualified choice. Every once in a while, employers will have no health insurance plans that are HSA qualified. In other words, they're all non-qualified for health, health savings account.
Speaker 1 00:12:58 So if none of them exist for your, your setup, I would suggest requesting that they add one. I don't know why a company would not offer that. I'm sure that there's reasons, but I would definitely advocate for adding that sort of option. It's just going to be a good option to have. So is, so the question is the next question that comes up commonly is if you have choices of, you know, different types of plans, some that are HSA qualified and some that are not, how do you decide between those? Is it just, you know, do you always go with the HSA plan or do you always do, is there some math you need to look at and how do you do that? So, first of all, it's not the HSA account itself is a fantastic tax shelter, but it's not always, you know, given that the HSA plan, the health insurance plan underlying is it's not always a given that that's the best route.
Speaker 1 00:13:52 It, it kinda depends on, uh, this is where it's going to depend more on your situation and what the options exactly look like. So we'll start with like the classic example, uh, cause I think it's more straightforward. So the classic example of like low utilization of health care, like you're young and healthy and you never go to the doctor except for like annual checkups and you're in VR. You don't have any health issues. There's no high cost prescriptions, no babies. You're not planning on having babies in the next year. So very low utilization of health insurance. And that situation is pretty much going to be, you know, almost always, in fact, I've never seen a scenario where the HSA plan is not substantially better. So the HSA, the higher deductible plan that'll opens up that option to fund the HSA as well. That's typically gonna be the best route in that situation because the premiums oftentimes are slightly lower or sometimes substantially lower with a higher deductible health insurance plan.
Speaker 1 00:14:50 Plus a lot of will help fund your HSA if you select that option. Um, plus it opens up those big tax benefits that exists by having that HSA option available. Um, now if you have higher expected health healthcare costs, um, upcoming, it gets more complicated. You have to run the numbers. I think it's best to run the numbers in the situation. So when it, like I said, when it's not as straightforward, you got to look at the different cost factors. So what are the, what are the key costs factors to look at? So I've, I've mentioned them already, but let's just kind of summarize these. So first big thing is just, what is your out of pocket costs for plan a versus plan B or versus plan C maybe. So what is your, uh, employee responsibility? Cost-wise for the different options, loaded, accountable versus high deductible.
Speaker 1 00:15:48 You also have to incorporate if this exists, if your employer matches your HSA or funds your HSA in that scenario, you have to incorporate the free money that would w would come with choosing that higher deductible option. So that's another, the second factor. You also have to incorporate those tax benefits with HSA. There's also tax benefits associated with paying premiums for health insurance. So you have to incorporate the collective tax benefits of one plan versus the other plan, consult your accountant for tax advice, a little side note, always console your account for tax advice. But the gist is you want to incorporate the tax benefits of one plan versus the other with an add together the HSA tax benefits, plus the premium tax benefits because premiums are also pre-tax. And so that should those, those big factors that should get you to a baseline net costs before any utilization.
Speaker 1 00:16:47 So with those numbers, you can start to compare plan a versus plan B versus plan C or however many choices you have, and then start to say, okay, before any healthcare utilization, let's look at the all-in cost before I use it at all. And so maybe plan a, is you say $5,000 a year, more than plan B. If you don't use healthcare at all. So you basically have to, and that's the example you would have to have higher expenses in plan B by at least 5,000. At that point you break even as compared to plan a. So ideally you start with comparing those plans, come up with a net cost of one versus the other, and start to look at what sort of healthcare utilization or healthcare expenditures you would have to bulk up or add up over the course of the year to start to, uh, break, you know, get to a point where the plans are not are equaling out.
Speaker 1 00:17:42 And ideally you have a good idea of what that looks like. So you can start to say, okay, if my actual health care costs are X, then that makes this plan, uh, the best option. So, and then if you're married, it gets, this is where it gets very complicated. If you're married and your spouse has all these options to, you want to kind of consider both both options. And then look at maybe if you have children too, whether you put the children on one spouse or the other spouse, if you work with us in our planning firm will help you run these numbers. So let us know if you're running into this situation, we can run these numbers. It gets a little tricky. I'll also link to a tool that we use to kind of help consolidate or, um, pull these numbers together and in, in sort of like a spreadsheet format.
Speaker 1 00:18:30 So you can, if you're looking to do this yourself, you can have a good kind of starting point there, but, uh, the key is do to run those numbers before you pull the trigger, or when you have open enrollment each year is to run those numbers and look at the different options and make sure that the all-in cost of one option is going to be in align in alignment with what your, uh, most likely situation is going to be. So in our experience in working with physicians in our planning firm, probably 90% of the time when we do those numbers, the HSA or higher deductible plan makes the most sense for people. And sometimes even people with high healthcare expected healthcare costs, it's just the tax benefits associated with that set up, tend to be substantial enough to outweigh the potential added healthcare costs associated with having a higher deductible plan.
Speaker 1 00:19:27 But there are situations where it's still makes sense to go with like the traditional lower deductible plan. You just have to look at those numbers for your situation. So we talked about the HSA plan itself and why that's such a great account to build. Well, then we talked about how to start to look at your health insurance options to decide on whether or not the HSA insurance plan makes sense, you know, given the insurance costs, plus the HSA benefits. Now what let's say you do have an HSA and you're utilizing that option. I think another big question that comes up is okay, now that I, so let's say you you've decided the HSA health insurance plan makes the most sense. You've started to fund the HSA account every year. You're putting in 7,200 a year, you're maxing it out for your family. Then the question is, do I use it for healthcare costs that come up?
Speaker 1 00:20:23 So, uh, most people tend to think of it as like, since it's a healthcare savings account, it needs to be used for healthcare as it comes up. So, so the question would be, does that make the most sense? So we typically suggest not using it for current healthcare costs and instead using your cash reserves or income, assuming you have those available that throws a lot of people off, or it's kind of a different, uh, seems to be different from the standard, uh, frame of thinking. And most people kind of have a hard time understanding that. So I wanted to kinda hit on why that's typically the best route, so you can kind of really make sure that's clear. So, so the, if we're comparing using your savings account, so let's say you have a, let's say you have a big ER, bill, you, you do go to the ER for an unexpected visit.
Speaker 1 00:21:14 It's a thousand dollars. Uh, and so you have to, you have a choice. Really. If you have an HSA account, you have a choice, you can use your HSA account to pay the thousand dollars, or let's say you have a thousand, uh, available in your cash reserves. So you can either use the cash reserves or use the HSA. So which one is better, I'm saying use the HSA, but why, so have you ever, uh, grown a garden or, you know, or planted anything really from seed? So if you've ever done that before, you know, like you sprinkle like five or six seeds in the hole and all typically four plants grow five plants grow, whatever number of plants grow. And at some point you have to trim it out and, um, kind of pick the one plant you think is going to be the best producing or maybe the healthiest looking or, um, but you gotta, you gotta trim out the others and kind of stick to the one plant so that there's there's enough space for them to grow.
Speaker 1 00:22:09 It's kinda like that with the HSA versus cash. So you're gonna pick the, uh, the most, the healthiest and the most likely best performing plant when you, when you trim those out. So with the save versus cash, it's like the HSA is like your top performer. That's like the best performing thing you have. I mean, it's, it's very much looking like it's going to do, it's going to do more for you or produce more fruit for you than really any other accounts. So if you compare it to cash, cash is like weak cash is a poor performer. It gets, it typically grows very little and it also gets taxed on the little growth that it has. So there's really no tax shelters with it. So if you have a choice, you're always going to want to utilize the thing that's less efficient, which is your cash.
Speaker 1 00:23:03 So, so if you have that, hopefully you have the choice. It's always good to have choices. So hopefully you have that choice and you can, you can, um, lean towards using cash. And then that lets your HSA. That's where you start to build the wealth. So you can build more wealth if you're not utilizing it. Um, and, and let it start to grow so that you can use it for, uh, you know, the future every once in a while, we'll see situations where your employer offers an HSA qualified health insurance plan, but they don't provide an actual HSA account through their payroll. That's not as, unfortunately that's not as efficient because you don't get to, uh, avoid FICA tax, but it's not the worst thing in the world. You can basically, you can up an HSA on your own individually. Uh, you just have to fund it and you have to make sure it gets deducted on your taxes.
Speaker 1 00:23:52 So if you're working with an account and you have to verbally tell them that you funded the HSA and or if you're doing it through turbo tax, you have to input it in there that you funded the HSA to whatever, whatever level so that it can get deducted on your tax return. So preferably it's always preferable to run it through payroll, but if you don't have that option, you can still set it up individually. Now, if you're self-employed or you're a partner in a practice, you know, it gets, there's a lot more, um, you have a lot more typically a lot more say so, so you don't have this option in your practice. You definitely want to look into it and at least have that option available. Maybe next time you're reviewing insurance options around open enrollment. I would definitely bring this up with your insurance agent and ask them to show you the higher deductible option and what it looks like as far as costs.
Speaker 1 00:24:38 The other thing for, for people that you come across. I think what I've noticed is a common rule of thumb or most common frame of thought on HSS is that most people think of it as a health spending account. They don't think of as a wealth building account. And that's the first thing. The other thing is that I see a lot of people that switched to an HSA plan. They end up going over the course of the year in their higher deductible health insurance plan. And as they incur healthcare expenses, they get frustrated that they have to write checks and they get down on the whole HSA concept because they're actually seeing the true costs of the healthcare that they utilize. And so sometimes they just write the whole idea off. So I think if you come across other people maybe that are, or are not quite seeing either one of those ideas, maybe they're not seeing it as a wealth building tool, or maybe they're not looking at the big picture as, as in like all-in costs versus just writing checks for a doctor visit.
Speaker 1 00:25:38 I would definitely encourage them to, they could listen to this for starters, but understanding these basics, that's the key. And even in your situation, like if you're not quite there yet, it seems like sometimes it takes, takes you a little while to get to the point where you're kind of fully there on the concept. So if you're not quite there, just keep reading up on it, learning about it. I think the more you understand, the more you'll gravitate towards this direction, but that, you know, education is the key there. So, um, feel free to let us know if you have more specific questions on like the concepts of HSHS and, and how that works. But I mainly wanted to just kind of start with the big picture and drill on the key benefits there so that you can start to ideally be in that position where you're maximizing the fish for your situation. I think it's worth it to spend a little time on this. I think the value, the benefits that can come with this are pretty substantial, especially as you start to look over time. I hope, hope you've enjoyed a topic today as always. It's good, good being within, uh, we'll look forward to next time as always, thank you
Speaker 2 00:26:44 So much for joining us today. If you found this valuable, please give us a review on iTunes and share with a friend. Also check out our
[email protected] for all sorts of additional content. See you next time. Finance for physicians is not an investment tax legal or financial advisor. All content included in this podcast is for informational purposes only and should not be considered financial tax or legal advice. Material presented. It is believed to be from reliable sources and no representations are made by finance for physicians as to another party's informational accuracy or completeness, all information or ideas provided should be discussed in detail. Well with an advisor, accountant or legal counsel, prior to the implementation, you don't have an advisor or like a second opinion. Feel free to check out our website for recommended advisors.
