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IFB128: HSA and How It Can Reduce Your Taxes

Announcer:                        00:00                     You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern. To decode industry jargon, silence crippling confusion, and help you overcome emotions by looking at the number, your path to financial freedom starts now.

Dave:                                    00:36                     All right folks, we’ll welcome to the Investing for Beginners podcast. This is episode 120 gig tonight. Andrew and I are going to talk about a couple of subjects that we have not talked a lot about or in some cases, not at all. If you are enjoying the show, please subscribe here. So we’re going to talk a little bit about taxes and a couple of tax vehicles that you could use to help save you some money on taxes. One of the vehicles we’re going to talk about is an HSA. And we’re also going to talk a little bit about a Roth IRA. So, Andrew, I know you’ve had some recent experience with an HSA, so why don’t you tell me your thoughts on that, and we could chat a little bit.

Andrew:                              01:09                     Well, let’s chat less about my experiences with okay. Medical issues and expenses because that will piss me off. Yep. But you know, an HSA is something that a lot of people can take advantage of. And even if you think you can’t, I think maybe you can. So HSA, what is that? And you know, how can it help the average person? I think when you kind of look at the landscape of, particularly if you live in the United States and the way that our, the expenses and hospital bills and doctor bills and surgery bills and how it’s just through the roof and astronomical and it’s, you know, if you don’t have good insurance and even when you do have good insurance, a lot of times these, the healthcare system in America is just the way it’s structured has really made a lot of services. Be expensive.

Andrew:                              02:12                     And you know, I, I remember reading a stat somewhere a while ago that said, one of the biggest causes of bankruptcy is medical debt. And it’s also one of the expenses in retirement that people sorely under the plan for. And so it can be something that really, you could have what you think is a great path to retirement and financial freedom. But when you’re not kind of taking some of the big medical expenses that can pop up into a cow in a lot of these things happen with, you know, just out of nowhere and so that can be detrimental and, and hurt you. So I wish I had the magic solution and outside of saying maybe move out of the country other than that like we have to deal with it as we live here. And the HSA can be one great way to do that, particularly if you start at a young age.

Andrew:                              03:10                     So they HSA, it is a health savings account. The way it works is you can put money into it, and then from that savings account, you can take that money, and you can use it to pay expenses, paying medical bills everything to do with health. Right. What makes it so special is that you get really good tax advantages with it. And so in reality, actually you can get like a triple tax advantage and that kind of sounds too good to be true. But Andy, posts on the blog recently outlining this, but basically if you think about some of the other tax vehicles that investors can use to, to save themselves from the taxman a bit. You have the traditional IRA where everything is tax-deferred, which means you get to deduct the taxes.

Andrew:                              04:16                     So taxes you have to pay this year, you defer. So you’re not paying them. So you got that deduction on your taxes and then when you take, when you use the money in for the years or whenever you retire, that’s when you pay the taxes on the money and on any of the gains that you’ve made. With a Roth IRA, it’s flipped. You pay taxes at the front and the onset, but at the end of it, all of your gains, all of your investments, they all grow tax-free. And when you withdraw the money, as long as you do it during retirement, then you don’t get taxed on that either. They say gets both sides of that, which is cool. So you can contribute to the HSA. And so like, let’s say I make $100,000 if I contribute 2000 to the HSA, now instead of being taxed on the hundred thousand, I’m only taxed on 98,000, that 2000 gets deducted and there’s I’m tax-deductible for this year plus anything it gains.

hsa

Andrew:                              05:20                     So, you know, however you want the manager to say whether you want to be an aggressive day trader or whether you want to trade options for you know, higher-income with higher risk tolerance or whether you know, you’re investing in as we recommend with longterm investing and you know, you might have a great stock that you need to sell. And so in a regular situation, maybe that would trigger a lot of capital gains tax. But in an HSA, you know, you don’t pay taxes on any of that growth. So you, you get the tax advantage, the capital gains tax advantage of a Roth IRA, but then you get the kind of income deduction from a traditional IRA or even like a traditional 401k how most people kind of think of that. And so you get those two factors. And then the third factor is you can like spend the money early.

Andrew:                              06:20                     So like you can use it on a doctor’s visit. There are other things you can use it. Like I think if you’re getting prescription glasses, you can use it on that. I think a dentist type expenses, you can use it on that, and you know, to wrap it all up with a ribbon and a bow, whatever’s leftover at the very end, you can use that as retirement too. So in my mind, the way I see it, and unless I see it wrong, I see it as a more flexible IRA that you can use to pay for any unexpected medical expenses that come up. And then, you know, at the end of it when you retire, it’s like another IRA because now you still have that money and now you can use it for other things too. So there’s a lot of cool parts about it.

Andrew:                              07:13                     Are you familiar with the other option that the, what is it? The FSA is an FSA. FSA? Yeah. I’m not as familiar with that. No. Okay. So with like an FSA, that’s usually controlled by whoever you’re working for. And so like the HSA is very cool because you take that with you, whether you’re working for this boss and then you had an HSA, maybe you, you work for this company that same HSA, it gets carried over. And so, you know, we’re recording this in 2019 the maximum contribution is somewhere around 3,200 or something like that. So you can put in about $3,000. And so really you can think of it as another retirement vehicle on top of your IRA. So, you know, you have the max, what is it, 6,000 this year that you can put into an IRA split between whether you’re putting that into traditional or Roth.

Andrew:                              08:08                     And then with this HSA, you can do another 3000 give or take. And that can be another way to grow some wealth and do it without paying taxes on certain aspects of it. And certainly, with the double slash triple tax advantage of HSA you don’t have to pay taxes all, all around the bat. And so if, if it’s something you’re not taken advantage of, I think it’s something you should consider. Something that I found kind of revealing, which I didn’t know in the past was that while it’s kind of like you, you kind of hope that you have an employer who offers an HSA, but you can actually also qualify for an HSA as somebody who’s self-employed, whether you’re an entrepreneur or a freelancer or you know, any, any other, if there’s any other situation where you are having to pay for your insurance rather than having an employer pay for it.

Andrew:                              09:12                     You know, if you’re going through like the Obamacare marketplace and having to get your insurance if you have a certain type of insurance plan and it’s, it’s, it’s like a high deductible insurance plan. If maybe you’re like a younger person and so you didn’t, maybe you’re like self-insuring in the sense that you’re willing to pay less in insurance premiums for a higher deductible. Right. A lot of those plans will qualify you for an HSA, even if the company you don’t work for necessarily offers that as a benefit. And so that’s something to dig into further and see, you know, how can I take advantage of this, even if it’s not something that seems apparent, there are certain rules. And like I said it’s going to depend on your situation and what kind of insurance policy you have and, and what kind of benefits either some of these offerings you now or what benefits are you’re not getting at all, you know, or are you kind of self-sustaining on your own?

Andrew:                              10:19                     You throw a spouse in there that can get more complicated too. But that’s worth considering. And I think because of the tax advantages of it, because, Hey, by the way, a company like fidelity offers an HSA, and you have full reign as if it’s an IRA. You can buy and sell stocks. You combine and sell ETFs; you can trade options if that’s your thing. So a lot of ways to kind of manage that. Very similar. And so why pay, you know, if you’re going to throw 3000 in the market, why pay taxes on one end or both? When you can do something like this on top of whatever else you’re doing, so kind of a good thing to consider and something that’s like, why not take advantage of it, it almost becomes like free money.

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Dave:                                    11:18                     Yeah, it does. You did a great job of outlining all that. And when I worked for Wells Fargo, we ha I would have people come in and open HSAs, and frankly I had not heard of them before I worked for the bank, and as I started to learn more about them as we would open them they’re fantastic vehicles. And for the right kind of person, it’s a; it’s a great fit for all the benefits that you talked about from the tax benefits to being able to use it as an additional retirement type of count to using it to manage your healthcare and your health functions. And I did come across quite a few customers that when they were opening accounts they were actually they would get contributions from their employer to contribute to their HSA to help with there.

Dave:                                    12:14                     That was part of their benefits package. And I was like, wow, that’s amazing. So some of these people would get up to 50 a hundred to $2,000 a year that they would get, and they would, you know, be able to contribute it to their HSA. So that was, that was pretty fantastic. And you know, some, some banks fidelity is going to be different, but some banks like Wells Fargo, they had actually kind of limited options to be able to invest in. And it was frankly, mostly just mutual funds that were funds that the bank ran. So you didn’t, you couldn’t just go in and buy whatever you wanted. So that would be something you’d want to check out before you open the account or if that’s something that you want to use it for, that kind of style of investing, it’s going to have a bearing on that too.

Dave:                                    13:02                     So that would be something you’d want to check out as well. Yeah, I, I bank with Bank of America. Mostly for convenience and the fact that there’s an ATM around every corner and I looked into their HSA and that it’s the same thing. It’s like mutual funds they pick out for you. Right. So yeah, I guess it would be convenient because you could, you know, transfer money in and out from where the bank of America accounts. But yeah, being somebody who likes to take more hands-on approach at line investing, that would be something to think about. Yeah, exactly the exact way. Yeah. Another aspect of them is they will give you debit cards to use for making payments. So if you are buying prescriptions or you have a copay at, at your doctor, depending on how your insurance is set up, you can use the debit cards that are linked directly to the HSA, and that’s how you can pay for your medical expenses.

Dave:                                    14:03                     And it’s, it’s nice too because, as Andrew was saying, those are contributions that you’re never going to get taxed on because you’re using it for what it’s designed for is to pay for your medical bills. And as a younger person, this is a fantastic vehicle you can use to cover some of your medical expenses because you know, Andrew’s with quite a bit younger than I am and so he, his health needs are far different than broken down old me. So, you know, I have to, you know, NHSA is not necessarily the greatest thing for me because I have a, a much lower deductible because I’ve got to use it more with, you know, as I’m getting older, and I have a daughter and I have all those other expenses. So it’s just, you know, it doesn’t fit what I’m trying to do for, for, for me personally. But if you’re younger, all of these are fantastic things, and this is something you need to take advantage of.

Andrew:                              15:02                     Hey, you’re not the only one with the body breaking down there I am and whatever, until you get to 40 cry me a river, so you don’t get hit up with any taxes or penalties. Yeah, that’s great advice. And with the illumination of commission fees, taxes are now one of the things that we need to make sure that we are cognizant of and pay attention to when we’re thinking about our retirement and investments. Because it used to be that we had to worry about commissions eating into our investments, but now we have to just worry about taxes. That’s the focus, I guess. That’s a good point. You know the best way to deal with taxes as an investor? No. Do tell you never sell [inaudible]. Yeah, true. I think that’s like a buffet or Charlie quote. It is. But what happens when he finally retired? Quote stops doing what he’s doing, what happens to all that money?

Andrew:                              16:11                     Well, whoever, whoever it’s passed on to whoever does over Berkshire and then they can continue doing the same thing too, right? Yeah, I suppose. Yeah. In all, in all seriousness, like there is, Buffet has been very public about being somebody who’s trying to be efficient with taxes as well. He understands how much that can eat up returns and, and, and some of his wealth. And so, you know, he’s a big advocate of not paying a dividend for tax-efficient. He thinks the stock buyback is more tax-efficient, which it is. Assuming the company doesn’t dilute shares lay there.

Andrew:                              16:53                     But you know, the other thing that he talks about is that If he were to try to manage a portfolio actively, he would prefer that the company inside that is the underlying business on the stock that he owns, that they’re the ones doing the work. And so he’s not the one doing the work and trying to train in and out of all these stocks and then dealing with the huge tax burdens on top of that. When you own something for a very long time, you know, once you own it for over a year, now you’re into longterm capital gains tax instead of short term cap, capital gains tax. And so those tax differences are pretty big too. And then you know, you don’t get tax on this investment until you sell. And so, you know, if you have a business that’s growing, let’s say it’s growing 10% it’s growing its earnings 10% per year. So you know that business paying taxes on its earnings every single year, just like I’m paying taxes on my paychecks, you’re paying tax on your paychecks, a blah, blah, blah, blah, blah.

Andrew:                              17:57                     But as an investor, you own part of that company, you’re not paying taxes on that even though everybody else is. And so it’s going to continue to grow. And so as long as that company continues to compound growth at 10% a year, you probably think that the share price of that stock will probably continue to grow 10% a year. And so you’re having all this growth, and if it continues on top of itself, now you’re having all this tax free growth, and that continues to compound, and that can be powerful. You contrast that to somebody who’s trying to get in and out of stocks and maybe buy one stock and then wait for it to go up 10% and then sell and then take that money and then try to go again and find something else that’s going to grow 10% and then sell each time he selling on that and getting that 10% he’s paying taxes on that.

Andrew:                              18:51                     And so really if even if he is selling, like even if he’s finding these stocks growing 10% selling, finding another stock, growing 10% selling, that’s not the same compounding as some as somebody who just stayed in the company. And I was able to grow that 10% organically and then do that to the share price instead. And so that can really make a big difference over the long term too, particularly if you can find a couple of the right businesses that are really poised and really have the financial characteristics and the business models and the margin of safety that really support being able to compound money like that for a very, very long time. And I think that’s why it’s something we try to focus on it as much as we can because that has so many benefits and tax burden and lowering that liability is, is a big part of that too.

Dave:                                    19:52                     Yeah, that’s good. That’s a fantastic knowledge to pass on to people. And that’s something that I think is not talked about enough and it’s good for us to remind people about that from time to time. All right folks, we’ll that is going to wrap up or discussion about taxes And Traditional and Roth IRAs. Some great information there. Andrew had some great ideas and some great thoughts and those are things that you should consider when you’re investing and thinking about your future. So without any further ado, I’m going to go ahead and sign us off. You guys go out there and invest with a margin of safety emphasis on safety. Have a great week, and we’ll talk to y’all next week.

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