Hi, I'm Ed Slott and I'm Jeff Levine.
And we're two guys who just love to talk about retirement and taxes.
Look, our mission is simple to educate you, the saver, so that you can make
better decisions because better decisions on the whole lead to better outcomes.
And here's how we're going to do that.
Each week, Jeff and I will debate the pros and the cons of a particular
retirement strategy or topic.
With the goal of helping you keep more of your hard earned money.
At the end of each debate, there's going to be one clear winner.
You, a more informed saver who can hopefully apply the merits of
each side of the debate to your own personal situation to decide
what's best for you and your family.
So here we go, welcome to the Great Retirement Debate.
Ed, you think that most people are good with money or bad with money?
Uh, a little of both, but probably most people are bad with money.
Alright.
I think that's probably true, and I think it's especially true with HSAs.
What if I told you that What's an HSA?
A Health Savings Account.
Alright.
Uh, for most people, what effectively becomes a slush
fund for their medical expenses.
And actually, it's one of the things we're going to talk about today.
What if I told you that nearly 90 percent of people weren't using HSAs efficiently?
Would you believe that?
I would.
Uh, I guess if you say so, I believe it.
That's it.
I'm not a liar.
Right?
? Actually, it's true.
Uh, according to an ERE study, that's the Employee Benefit Research Institute,
uh, about 90% of individuals in their HSAs keep those dollars only in cash.
Now, uh, you know, one of the biggest benefits of the HSA is the fact
that there's tax free distributions for qualified healthcare expenses,
which means if you invest the HSA and you let it grow over time.
That growth can be used tax free to pay for your qualified medical expenses.
And you get a deduction on the way in.
That's right.
In fact, the HSA Triple tax.
Yes.
In fact, you know, a lot of people say triple tax.
I don't even like that.
I think for a lot of people we should talk about quadruple tax.
All right.
I know the first three.
All right.
What are the first three?
Well, obviously the deduct we just talked about them the deduction on the way in
Yep the tax by the way No matter how much income you make something that's
different between that and a lot of other like your ira contribution deduction
No matter how much money you make You cannot be phased out of an HSA deduction.
Sounds like a good deal if you got a lot of money.
Not too bad.
All right, so that's one.
All right, the tax deferred growth in the account.
Definitely number two.
And the other one you just talked about, if you pay qualifying
medical expenses, tax free.
That is, that's three.
So there's the fourth one.
For a lot of people who have access to an HSA via their employer, if they make those
HSA contributions as a payroll deduction through something called a Section 125
Cafeteria Plan, that's basically the a la carte version of employee benefits, right?
I want a little bit of this, a little bit of that.
It's kind of where it gets its name, cafeteria plan, you know, a little
bit of this, a little bit of that.
Those contributions not only reduce income tax, but they also lower employment
taxes, like social security taxes.
And medicare.
And medicare, exactly.
So, the HSA can actually be quadruple tax benefit for a lot of folks.
But, uh, You know, while people are working, they should be contributing
to the accounts if they can.
In fact, because the HSA is triple tax free or triple tax benefit, I should
say, uh, and in some cases quadruple.
In general, it should be the place where people put their first dollars
of savings each and every year.
You mean some people don't?
I, uh, I've heard that, yes.
I'm looking at one of our producers here.
We had a little conversation before we started.
And he said, what did he say?
He said he has money in his 401k, but not his HSA, and I said, uh,
he said, why would you do that?
And he said, well, isn't that the place where we start?
And I said, well, that's why we're having this podcast, you know?
Right, right.
That's right.
So, uh, The very first thing that you should be doing.
I might even correct him on something totally unrelated.
Why is a young person, this guy, putting money in a 401k?
Let's keep talking about him as if he's not in the room with us.
Yeah.
That's good.
All right.
Roth.
You should go Roth.
Roth 401k.
Build tax free while you're young.
There we go.
Look, this is a podcast for one, ladies and gentlemen.
All right.
An audience of one.
That's right.
An audience of one.
There you go.
Hopefully.
Maybe we'll get two.
We'll double our audience.
All right.
So here's the deal, right?
Once HSAs are, are, are unique.
Um, different from any other type of account.
You know, normally when we think about things like a 529, that's usually the
account that people compare it to because it's a tax preference account for a
very specified type of expense, right?
And you might say retirement account, but retirement account, once you hit a
certain age, you can use it for anything, but 529s are for education expenses.
If, uh, if you have an, a healthcare savings account.
you can reimburse yourself for previous, uh, previously incurred medical expenses.
As long as you haven't taken them out to date with a 529
plan, expense and distribution have to align in the same year.
That's not true for HSAs, which means what you should really be doing for the
most part is putting away your whatever, three, four or five thousand, whatever
you can put into the HSA each year.
And if you have the ability to do so, Let it grow and pay any current medical
expenses out of out, you know, out of pocket, so to speak, because if you
put in 5, 000 today to your HSA and it grows to let's say 30, 000 over
the next Let's call it five years.
If each of the next five years, you had 6, 000 of unreimbursed medical expenses,
that's six times five is 30, 000.
Well, lo and behold, in five years, your 30, 000 can come out
completely tax and penalty free.
So the government is paying.
The cost of your healthcare, essentially.
Yeah, it's a, it's one of the unique features of HSAs and it's why, you
know, when we talk about 90 percent of people, according to that research
study from, uh, EBRI, which we can include a link to within show notes
or something like that so people can look at the study themselves, but
90 percent of people putting this money in cash, cash doesn't grow like
other assets over time, which means you're not using your HSA efficiently.
I get it.
If you're tight on funds and you've only got, you know, uh, you know, your
You may want to put money into your HSA, at least get the deduction, and then
use that money for medical expenses.
But to the extent you have the available cash flow, your medical expenses,
at least while you're young, should be paid from other sources to let
that HSA grow tax and penalty free.
It effectively becomes like another Roth IRA.
Right.
Because you've had a lifetime's worth of medical expenses to accumulate.
Well, not exactly, uh, like a Roth IRA because you have to, to get the third
benefit, getting it out, uh, tax free, you have to use it for qualified expenses.
That's right.
It does have to be used for qualified medical expenses, but as people age,
they tend to have medical expenses.
So, I mean, if we think about this.
That's a pretty good bet.
Yes.
I would take the long on that for sure.
So, so that brings us to the, the real focus of today's discussion,
Ed, which is when should individuals Use their HSA during retirement.
Now, we're really focused on the when here, so I think it's actually
worth noting, you know, we talked about what happens with your HSA
during life and how this works.
Uh, we should talk about HSAs, I think, a little bit at death as well.
Well, that's where, the way I understand it, it's, it's not that
great tax wise because beneficiaries have to take the whole shebang and
they get hit on that all at once.
That's exactly right.
So, we, we really actually, if we want to be more specific, we've got to look
at two different types of beneficiaries.
Right.
Right, a spouse.
And everyone or everything else.
Well it's kind of like with the IRA, the spouse has special privileges.
Uh, but after that, that's why you have to manage how, how much you build it up.
Yes, that's true.
Yep.
Which I, kind of, you're, you're, you're getting to, you're hitting on
exactly, I think, some of the things that we're going to need to expand on
to make sure our listeners, uh, Uh, are really understanding how to think
about using their HSAs most efficiently over the course of their retirement.
But just to reiterate, right, at death there's these two possibilities.
Either you're the spouse beneficiary or you're anyone or anything else.
If you're a spouse.
then effectively the moment the person with the HSA dies, the spouse is the
owner of that HSA instantaneously.
Like there's in retirement accounts, you've got options.
Do we want to remain a beneficiary?
It's basically like a spousal rollover except it's treated
that way instantaneously.
Yeah.
If it's any other beneficiary, I think you used the words, The whole shebang.
Well, that's true.
The whole shebang becomes taxable immediately.
Right away.
And there is no, uh, No way to stretch it out.
That's right.
There's no, it's the year of death.
It becomes immediately taxable to the beneficiary.
Now, But remember, there's still a beneficiary.
That's right.
They're still getting money that they weren't, they didn't have elsewhere.
Now, there is, You know, not really relevant for our discussion today, but
I would be remiss if I didn't insert a little bit of a planning nugget here.
There's one exception to this rule where the beneficiaries, well,
it's not even an exception, but one interesting thing you can do.
Normally, if you leave the HSA outright to an individual, let's
say a child, the child will pick up that income on their own tax return.
By contrast, if you name your will or your estate the beneficiary of your HSA,
which you would almost never, ever do for a retirement account, but there's actually
a potential advantage on the HSA side.
If your will or the estate is the beneficiary, then that HSA becomes
taxable on your final tax return.
So if you're at a lower tax bracket than, say, your beneficiary, You
know, maybe you're 80, 85, you're not working, your income in retirement is
lower than your child who's 50 or 55 or 60, maybe they're still working.
You might leave it to your will.
Pay tax on it at your own rate and then have the proceeds at or after tax
be distributed through your estate To the you know to your child anyway, so
they'll get the money but having paid tax at your rate versus theirs, right?
Let me ask you that I'm not sure about this, but if you do it that way Yep, and
there are still unpaid medical bills at death Can any of that be used for that?
It's a really good question.
All right, so the, the way that it works with the HSA is that what we
know for certain is that year of death.
Yeah, exactly.
So, so, so you have, you have a one year, you can pay medical expenses
for the previous year and those distributions, if paid by the beneficiary
will be tax free for the decedents.
medical expenses.
In other words, if dad dies and dad had some medical bills before he died that
hadn't yet been paid but need to be, the beneficiaries of the HSA can pay
those expenses tax free within a year.
If they don't, then it's taxable.
But it's important, and this is kind of, it leads into the second issue.
What is not clear, however, what the IRS has never Uh, the one thing
that's not perfectly clarified is what happens to an HSA, uh, the
built up tax free accumulation that you can repay yourself if you will.
Like all your previous unreimbursed medical expenses, does that transfer
if you will to a beneficiary?
And it would seem that at least if we're talking about a non
spouse, the answer is probably no.
So, effectively, right, to, to make this a little bit clearer, to
give an example here, so everybody.
Because that's opposite what you just said on the other scenario.
Correct.
Exactly.
So, let's make sure everybody, uh, you know, listening follows along this.
Let's say, let's just say you had put in over the years 20, 000 worth
of HSA contributions and that over the course of your life, that 20,
000 had grown to be worth 100, 000.
Right.
And let's say that over, you know, a, a 30 year period from the time
you started your HSA to the time you died, you had accumulated 100, 000
of unreimbursed medical expenses.
You had paid these dollars out of pocket all these years.
Well, if that's the case, then you could turn around and take that
100, 000, 100 percent tax free.
Who's you when you're talking?
The, the, the person during their lifetime, right?
The, the original HSA owner could turn around and take that 100, 000 out 100
percent tax free before they died.
However, if they died having not taken that distribution first,
it at least appears, at the very least it's gray, but I would say
it appears that the beneficiary, pays tax on the full 100, 000.
Whereas if, you know, the original HSA owner, the moment before they died, right?
Like their last act as a human being on the face of this earth
was to make sure that's right.
Somebody grabbed their arm.
Yeah.
That's it.
Somebody grabbed the arm and grabbed the HSA distribution, you
know, form and said, take it out.
It would have been tax free could then be left to the kids tax free that way.
It appears that goes away when it's a non spouse.
Uh, and so.
So that, that brings us to the idea of how do you efficiently
use your HSA during retirement?
One thing you really have to be mindful of is you don't want to
die with unreimbursed medical expenses having not been taken out.
But you want to do that later in life to keep the account building.
That's right.
It's like a game of tax chicken, right?
It's like how long can you wait and let the growth, you know, the
earnings continue to grow so that you have more tax free wealth.
But don't wait too long because if you do, you might, you know, so
like anything has to be monitored.
That's right.
Yeah.
Certainly as someone approaches the end of their life, especially
at, if they're single, right?
Because if they're married, that HSA immediately becomes the spouses and
it would seem that you could still reimburse yourself for your deceased
spouses, unreimbursed medical expenses.
But if it's again, if it goes to a non spouse, like once, if you're
a single person or if the first spouse has already passed away.
Then you want to be really mindful about not dying with potentially tax
free distribution dollars in your HSA.
that would be taxable to your heirs if they passed on that way.
Now these unreimbursed, I've seen this come up in some tax articles
and things, these expenses, they could be back for years.
Unlimited from the time you established your HSA.
That's the problem.
Yes.
Documentation.
That's fair.
It's why I actually I encourage people they should create a digital folder.
That's a good idea.
That's a, that's a digital meaning like on a computer.
Yeah, yeah, yeah.
You know, that's the thing where you type with it.
Yeah, I'm just making sure you know.
Yeah.
So, uh, you know, the idea, create a digital folder and
just compile a running total.
What I would actually encourage people to do is have You know, just PDF after
PDF or a copy of these receipts in there, scan it all in there and then keep a
spreadsheet, you know, like an Excel spreadsheet where each year you total up
your unreimbursed medical expenses and you have a running total there for yourself.
Even if people don't do that, a simple thing, every time you
pay a bill, because these are unreimbursed, you paid them yourself,
but you didn't reimburse yourself.
So now you didn't get any insurance to cover it after the fact either.
Yeah.
Okay.
I know you know what unreimbursed means, Ed.
I'm talking to the listener.
All right, but I'm saying an easier way than people, you know, in the, on their
deathbed starting an Excel spreadsheet.
Uh huh.
All right.
Yeah, that might not be reasonable.
Yeah, fair.
All right.
But it's gotta be a running, you know, like with any expense, a medical
expense on a return or charitable, you have to have contemporaneous
expenses at the times, documentation of the expenses at the times you
just scan the bill as you pay it.
Okay.
or have somebody do it, and like you say, you put that in some file
on your computer, and at the end, because this could be a big item,
like you used 100, 000, that could be something that gets examined by IRS.
Sure.
A big hit.
So you'd have to, it'd be, you can't say, well, that was 20 years ago,
you know, that's not going to cut it.
You know, and, and today this is a bigger issue than it ever has been
in the past, because Ed, you know, today, uh, More than half of all
workers who receive their employment, uh, or their health insurance through
their employer have HSA eligibility.
Which means that more people than ever today Can contribute to an
HSA and obviously, that's right.
Well, he can, he just, we're looking at our producer again, making sure that he,
he takes advantage of his HSA next year.
Uh, but more people than ever can contribute to their HSA and to
make sure that they're getting this benefit of this triple.
Or quadruple tax benefit account and to use those benefits.
Remember, if all you do is contribute dollars and then take them out as
soon as you have a medical expense, which is what most people do, you've
only gotten one of the tax breaks.
You only got the deduction.
You didn't get tax deferred growth because you didn't have any growth and
you didn't get distributions of tax free earnings because you had no earnings.
So you take this beautiful triple tax benefit account and you turn it
into a single tax benefit account.
And clearly Ed, we know three, is better than one!
Right, but you made a point earlier, it's not as easy as it sounds.
Especially if you're younger, you use the term, if you have the cash flow outside.
If you don't have the money, you have to use that money.
That's right.
You're right.
If you look, if you need the money, you need the money.
But there are too many people put their money into the HSA.
They leave it in cash.
They think about it as the first place they go for medical expense.
And for most individuals, it should be thought of as kind
of a supplemental Roth IRA.
Because as long as they have a cumulative record of those medical
expenses, any amount of medical expenses that have been unreimbursed.
from the time they establish their HSA onward can be redistributed,
repaid, reimbursed from the HSA, tax and penalty free.
And by the way, if there are no medical expenses at 65, any of the
earnings inside, well, any of the HSA dollars, I should say, not just the
earnings, but the contributions and the earnings, become available penalty
free, kind of like a traditional IRA.
So at worst case scenario, If you put money into an HSA, it
functions like an IRA after 65.
And in a best case, at least from a tax perspective, assuming you have
medical expenses, which look, we hope you don't have, but the reality is
almost everyone has medical expenses.
Yeah, then you can reimburse yourself and your IRA, uh, your
pseudo IRA becomes a pseudo Roth.
It is a home run from a tax perspective.
One other little rule we didn't, because you just mentioned
65, can't keep contributing.
That's right.
You can only contribute.
Well, Most people can't contribute after 65, and the reason is you can't
be on Medicare, uh, and contribute.
However, some individuals, if you continue to work for, let's say, a large employer
with more than 20 employees, after 65, you can continue on with the employer's
health coverage, and that might still, you know, and delay Social Security.
Um, that is something you could be aware of.
Also, uh, one other note there, if you're taking Social Security, Right.
And 65.
Yep.
Then you have to enroll in Medicare.
At least part a, you have no choice, in which case, once again, you need
to stop those HSA contributions.
There's lots of nuances around this.
Uh, there's a six month retroactive rule that catches a lot of
people off guard if they retire after 65 from a large employer.
All of that is important.
And That's why you should have a, you know, professional advice
when you're in these situations.
But, you know, today for today, our primary focus was, you know, when
should you use your HSA in retirement?
And the answer is, at least today.
You know, if we think about this from a theory perspective, as close to your
death as possible, But not too much.
But before, yeah.
But before you die.
But, uh, the point is, the amazing benefits of something that's not used,
what'd you say, that's used, that's not used by more than 95 people, at a minimum,
using it incorrectly, or at least, let me say not, at least they're not
using the HSA as efficiently as we can.
Because they keep it in cash.
That's right.
Keep it in cash and use it as a slush fund as opposed to having that
long term tax free growth and then reimbursing oneself down the road.
Something to think about.
Absolutely something to think about.
And lots to think about for us, including what we're going to talk about next
time, because today, Ed, we're done.
Okay.
See you next time on The Great Retirement Debate.
Jeffrey Levine is Chief Planning Officer for Buckingham Wealth Partners.
This podcast is for informational and educational purposes only and should
not be construed as specific investment, accounting, legal, or tax advice.
Certain information mentioned may be based on third party information
which may become outdated or otherwise superseded without notice.
Third party information is deemed to be reliable but its accuracy and
completeness cannot be guaranteed.
The topic discussed in corresponding arguments are those of the speakers
and may not accurately reflect those of Buckingham Wealth Partners.