Practical Ways to Build Wealth: Health Savings Accounts

Hi, David.

Great to see you, Irvin.

What gets you out of bed these days?

Well, pretty much every morning I’ve got to get up out of bed because I’ve got a daughter who’s got to get to school and I’ve got to drive her there. She has yet to get her driver’s license, so that’s a requirement for dear old dad.

Tell me what drives you before we get into the nuts and bolts of today’s podcast, what is it that gets you excited about life in general?

I have a natural curiosity with things, so I love just talking with people and learning things that they know about and then sharing things that I know with them. And I think really in our society, the more information you know, the better off you’re going to be, the more well-rounded you’re going to be. And if someone can share their knowledge with you in a way that you can make sense of it, it’s going to expand your knowledge base and it’s going to let you help more people. In the end, if you can help more people, I think you’re doing good in the world.

And you’ll be happier to boot.

Absolutely.

Well, to start our podcast off, I’m Irvin Schorsch, founder and president of Pennsylvania Capital Management in the Huntington Valley, Pennsylvania area. And as you know, our mission is to not only create wealth and help our clients preserve it, but to also provide solutions through the lens of money and finance. I’m excited to introduce you today to an expert in the insurance and planning field, David Giesler. David works with individuals and families to help them protect their families and fill in the gaps using insurance techniques and strategies. I’m very excited about our conversation today and what actionable steps our listeners can take away from this podcast. As you and I were talking in our last get together, there are ever more practical ways to build wealth while protecting our families. And when I think about HSAs the topic of today’s program, I think about these relatively dull old-fashioned accounts that can be set up to pay medical bills. And yes, pre-tax, but man, there’s a lot of excitement inside of HSAs. Start us off, why are HSAs so integral to building wealth through return?

Well, I think the first thing I would say there, Irvin, is I wouldn’t really call them dull because it does really create a unique strategy for any individual out there who has a qualifying high deductible health policy. It’s giving them a way to save money on a pre-tax basis. It’s giving them a way to grow those dollars tax deferred. If you are a purchaser of some healthcare services and you can decide how you want to spend that money, I now have more choices on maybe I want to use it for dental, maybe I want to use it for vision. Maybe I need it to cover my deductible. I have a wide variety of resources as to how I can utilize the money. But then on top of that, you could think, well, wait a minute, maybe I don’t need to use all these dollars right now. And as I accumulate those dollars, wealth inside my HSA, I’ve got a lot of options down the road. One of those being a way to obviously increase my retirement income by distributing that at retirement time. So there’s a lot of options there.

If my employer doesn’t have a high deductible HSA plan, am I stuck out in the cold or is there something I can do about that?

Well, I mean, I think the first thing is maybe try to talk to that employer about would we be able to add this as an option as part of our healthcare package and they can talk to their insurance broker to see if that would be made available to them. If for some reason it’s not available, then the only other option that person’s going to have is, can I secure my own separate individual high deductible health policy, so therefore I can then contribute into an HSA plan? So it’s now putting you down an entirely different path. Probably if I’m a worker at a company, I’m going to want to see if my company is willing to change the strategies they’re using to provide healthcare services for us. I think that would be an important discussion to have with HR. And if you’ve got many employees at a company who see this as, it’s definitely a perk for us. I’d think that employer would want to at least take a look at that as a good option for them.

Let’s talk for a minute about that age-old adage that what you’ve got to do is fund your 401(k) plan first, put those dollars aside, they go in pre-tax. And later on when you need it, once you’re over 59 and a half, you can take out your money without penalty and just pay ordinary taxes when you’re ready. Certainly sounds good. Let’s examine here. An HSA is much better. How do you see it?

Well, I think one of the ways that HSA provides really a wider variety of options. I mean, if you kind of think about if I’m that worker right now at any particular company, one of the issues that I’m looking at is yes, how do I get maximum pre-tax deductibility? I certainly get that in my 401(k), but I also get it in my HSA. So now if I can also look at maximizing dollars into an HSA. I know one thing, I might not have medical necessities today and have medical costs, but I might have them somewhere down the road in my future. Someday I may be under the Medicare system. Someday I might need to use services such as home healthcare, assisted living care, nursing home care. No one can predict whether they’re going to need these things or not, but I would just give you the statistic which is roughly 43% of the population when they turn age 65 may need to use those services somewhere in their lifetime.

So let’s talk about one HSA strategy that most people are completely unaware of. I could use my HSA later on in life if need be to potentially purchase a qualifying long-term care insurance product. This then is going to be utilized to cover nursing home costs, assisted living costs, home healthcare related costs. It could be used in any of those different ways. Money I had in my 401(k) plan, it’s great to have it there, but obviously that money is going to be taxed when it’s distributed. And if I’ve got to use those dollars to cover nursing home related expenses, unfortunately I think you understand what will probably happen. I might end up running out of those dollars. If I could use a block of those dollars now as HSA dollars to transition into an insurance benefit, I might be able to double, triple, quadruple the value of those dollars to cover those expenses. I’m not saying that a person has to do this, I’m simply saying it’s giving that person more choices and how to spend those dollars in their future, and I think we as Americans, we’d prefer to have more choices than less.

Let’s get a little bit involved in the nitty-gritty. For 2024, how much can we put aside both as an individual and as a family into an HSA?

As an individual, it’s going to be well over 3000. As a family, well over seven some odd thousand dollars. If you can set aside these amounts to money each and every year… And if you’re over the age of 55, there’s an additional thousand dollar catch up provision you can fund typically up until the age of 65. So what that’s going to do is if you think about it, if I’m now directing maybe hypothetically close to $8,000 in an HSA, and I’ve done that over the course of X numbers of years, I mean, think about it. If I’ve been doing this since I’ve been in my late twenties or thirties, I could easily have possibly a couple hundred thousand dollars growing in one of these HSA accounts. Even as a single, if I can generate a substantial chunk of money to the tune of well over a hundred thousand dollars in my HSA easily over 20 some odd years, I don’t think that’s anything to sneeze at.

What I like too is if you wait till you’re 65, you want to use it for other things, you pay ordinary taxes, so [inaudible 00:07:46]-

Yes, there’s no penalty taxes at all. If you distribute that money once you’re 65 or over, it is not subject to any type of penalty tax. It’s simply taxed as your ordinary income. Just like money you would pull out of your 401(k) or IRA, it follows those same rules. So again, giving it some excellent benefit options.

If we look at the 401(k) side, no matter what you do, you’re going to have to pay the tax piper when you take the money out. You follow the rules, you can skip the penalty and take it out after 59 and a half. In this case, you got to wait till you’re 65 to be able to do other things with it. But anywhere along the way, as you said earlier, you can pay for your dental bills, eyeglasses, whatever else. So you can pay little things along the way, but basically invest it, compound the money tax-free for many, many years. If you or your spouse happens to need some long-term healthcare, can you use it for either of you when you’re in those later years of life?

Absolutely. If I’ve held this HSA account as a married couple joint account, I could have that set up for both husband and wife. Each spouse could do this if they so choose, and it’s now going to, as I mentioned, give them the availability of healthcare related dollars that they’re going to be multiplying two, three, maybe four times. This does depend on their age, when they set this up. It is medically underwritten. So I would explain that you would at least have to have a good enough medical history to be able to qualify for the long-term care insurance benefit. But I would suggest if you’re going to consider doing that, do it right about the time you’re doing your retirement planning.

When you sit down with someone like yourself, Irvin, and you kind of go through all your financial information, this would really be the time to contemplate doing this as a strategy. Because once you’ve locked up that sort of bucket of money to cover long-term care costs, you now know that you’ve got a big potential dilemma probably for yourself. And if you think about it now, I don’t have to go down the path of losing my house and all of my other assets, just nobody would want to necessarily be in a nursing home. But if that truly happens for people, it’s giving them now a strategy to help cover those costs at an increased valued amount. So it really is giving them more bang for their buck. That is my take on it.

If we look further to the long-term effects of this HSA, what happens if the couple that bought it, and I’m assuming they can buy it in joint name.

You’re going to have an HSA established for both parties. Each of them contribute to it. Their contributions are based upon filing that joint tax return. They are married so each one can contribute. They can go up to the maximum allowable amounts for that family each and every year. The government sets those numbers each and every year, and they go up a little bit each and every year. So whatever the dollar amounts are in 2025, 2026, whatever it becomes, they can continue to contribute those dollar amounts. There’s no problem in doing that for both spouses. Now, here’s what I’m going to say. Be aware that if I have one spouse who works for a company that doesn’t have a qualifying high deductible plan, he or she cannot contribute money into it, but the other spouse can if they’re in a qualifying high deductible plan. So one spouse can do it, if both spouses don’t have it, the one who does contribute the individual amount.

What happens if one or the other of the couple should die along the way?

If they haven’t used up all the money in their HSA account, and if one of the account holders has unfortunately passed away, the surviving spouse in essence becomes by default the beneficiary of those funds. So if I’m married, if I’ve passed away my spouse, she’s going to get the money in my HSA account. Now what would be key for her is she can use those dollars for any qualifying medical expenses she would like. She just can’t add more money into it unless she also is covered by a qualifying high deductible health policy. That would be the key. So unfortunately, sometimes this does happen, but you do have a named beneficiary. If for some reason a person is under the HSA account as an individual person, which is perfectly fine also, and they have unfortunately passed away, then whatever they have within their will that dictates how their assets would be distributed, the HSA dollars would be distributed just like any other asset, and it would go through their estate. Their family members will have access to those funds after we go through probate and the whole legal process.

So in theory, those dollars, if you were putting in your, as you pointed out, close to $8,000 a year at this point in time, and if it grew to $200,000, 20, 30, 40 years from now and both parties were to pass on, it would go through to the beneficiary. Are taxes due or is that more of an estate tax question?

Well, it goes their estate. So it becomes the probate laws in each given state. So of course, our wonderful state of Pennsylvania does have a Pennsylvania state death tax, so it would be like any other bank account that they would have. It would then be subjected to the Pennsylvania state death taxes through probate. But I recognize every state has their own probate rules and therefore the distribution of those HSA dollars, the tax rules would be different state by state.

And federally, any exposure there?

Not normally, unless these people were so wealthy that they would be hit with the federal estate taxes, which of course now are well into the 13 million numbers per person. So as a married couple, you’re talking about someone with over $26 million before federal estate taxes would become due. So their small HSA account would get added into those totals in that regard, but that’s the only way federal taxes would come into play from an estate standpoint. So it probably won’t impact anybody. The majority of people will not be hit with a federal estate tax on the distribution of an HSA if they haven’t used up all the money, and both account holders, if they were married, has now passed away.

And from an income tax perspective, any issues?

It’s either just the federal estate tax or the state death taxes in the state that that person resided when they passed away, but no other further income taxation or anything like that.

Individuals or young marriage, and they’re looking at HSA or 401(k). What precautions should investors take if they’re looking to grow their money as much tax-free as possible through and beyond their retirement date? What kinds of thoughts should they be going through HSA versus 401(k)(2)(C), if there’s any other choice other than as we discussed earlier, maximizing that HSA knowing you could use it for medical or you could use it to create wealth?

Well, let’s talk first of all within the scope of the HSA because this is one important component, and every HSA account holder, whoever is the trust, the bank, the financial institution, they all might have different rules as to how your HSA dollars could be in essence invested, let’s say. It may simply sit in a general interest account, but if it’s being held by a fund manager, this might be held by a Vanguard, a Charles Schwab, a Fidelity, any of these types of companies, they may say to you, “Not a problem. Your HSA dollars can be directed into our family of mutual funds to grow that money. Just like it would be in your 401(k).” Look at whatever your annual max out of pocket number would be. So if you’re a family, for example, right now in 2024, your annual max out of pocket is a little over $16,000. As a single, it’s again just right around $8,050. So here’s the deal.

I would suggest that at least the initial dollar amount you’re funding into your HSA, keep that block of money in simply like a money market account, a fixed interest bearing, no risk. So therefore, should you have a worst case scenario happen, and we know we have to cover those costs of out-of-pocket expenses because our high deductible major medical plan is not paying every penny for everything. You have an upfront deductible, you’re going to have some co-insurance, so I’m going to recommend have enough money set aside to at least cover those costs first. Once I’ve gotten my HSA to the point where if I’m single, I’ve got around eight to $10,000. If I’m married, I’ve got probably around 16 to 20,000. Then anything above that, direct those dollars into any type of investment choices that you feel comfortable with.

That way you’re always going to have the money necessary to cover those costs at least upfront. Then after that, I mean whether I’m in my 401(k). Or I’m in my HSA, it’s really just a matter of where do I want to max out my dollars if I’m looking to max out dollars in the HSA, I’m also understanding I’m liking the idea of the flexibility of the HSA dollars, not only today, but down the road. I certainly have some availability of my dollars in my 401(k) account, but I know that’s all taxable upon distribution. I know that if I use my HSA dollars to cover medical expenses, even when I’m retired. I’m not going to do a class on Medicare. If I was telling you about Medicare, your brain would explode, but my point is Medicare doesn’t pay for everything. No. So I already know I’m probably going to have costs later on in life that I’m going to have to address.

I recognize that for that single individual example, keeping eight to $10,000 on the side is appropriate. Makes sense. That way if you need to go pay some medical bills, it’s ready. If you’ve had a successful investor who already has money on the sidelines to pay that and says, “I’d rather-”

Yes.

Because if I take the money out, it can’t grow for the next 20, 30, 40 years, I’m going to just use the HSA to create wealth for my family and myself. It comes down to, like you said, what do you actually want to use this money for? My view is create wealth, get it compounded over 30, 40, 50 years, start early. Just like we would recommend in my book Reinvent Rich, it’s essential that we create as much wealth as we can before Uncle Sam puts his hand in our back pocket. Because the more dollars come out to pay taxes, the less compounds [inaudible 00:18:43].

Yeah, I absolutely agree, and if you have another avenue, one of the things that you certainly may be talking to clients about is having their own sort of personal emergency account or however you want to look at it. If I’ve got that scenario set up, then I could look at it and say, I’m not as worried about it from the HSA strategy component because I’ve already got the dollars set up somewhere else. A lot of times the clientele you might be working with versus people I’ve talked to, they might have different mindsets with it, and I absolutely agree that that can be another effective strategy. You want to have that money growing to its maximum capacity, and if you can afford to do it, get as many dollars in there as you can because it’s not like you’re losing those dollars. This was the biggest challenge.

If you went back to 2004 when this law first passed, and if I was out there meeting with clients, business owners talking about it, one of their concerns was a previous rule under something called Section 125 plans called flexible spending accounts. These accounts had something called a use it or lose it rule, where if you didn’t use the money up by the year-end, you forfeited those dollars, so they would always be like, “Oh, I know all about this. We’re not getting into it because I don’t want my employees to…” I’m like, “No, HSAs don’t have the same rules as flexible spending accounts FSAs, even though they sound almost the same, they’re not the same thing.” You can continue to have those dollars keep rolling over year after year. They’re not subjected to forfeiture. That’s most important to understand also about the HSA dollars.

To add to your thought, I like the fact that some of the Schwabs and Fidelitys are now offering more self-directed type choice to compound your money in smarter ways and grow it even further. You can use index funds, you can use good solid asset allocation approaches to create wealth like you would in a personal account. Not as much flexibility, but still plenty of good choices.

You just have to commit and say, you know what? I’m going to dive headfirst into this. I’m going to do it, but of course the precursor to saying I’m going to do it is making sure I am covered by a qualifying high deductible health policy. This becomes key and I need to understand, is the employer that I’m working for offering that to me, and if they’re not offering it, would they be offering that to me in the future? Because I would like the ability to participate. Business owner, can we please do this? You get enough employees voicing their opinions that they want to do it and employers, they should listen and they should consider offering that as an opportunity for the workforce.

As we look at the whole area of HSAs, any other nuances you would recommend our listeners pay attention to as they consider the HSA opportunity?

I mean, I think the only thing you can kind of be looking at is just continuing to monitor the federal government’s viewpoint with this as to maintaining the tax deductibility of this. I truly believe once you have it, the government can’t take it away. All I can really do is consistently monitor that approach. Your broker, producer, whoever you’re working with should obviously be able to continue to communicate that to you and then constantly looking at where are we at with regard to the dollar amounts I can fund into this. And would anything change with regard to the federal laws as to what can be considered a qualifying medical expense? So just to give an example, obviously since COVID has occurred, a lot of people are doing things a little bit differently. So my point is more and more people might be using things like virtual doctors, Teladoc, things like that.

If I can get my medical services provided to me, if it’s something as simple as normally I just went in and they had to give me a prescription, or can I do any of this stuff in a virtual format? Will that reduce my cost of the medical services allowing me again to save more money out of my HSA and not have to spend that money or a higher dollar amount for this, and then I can continue to maximize that growth? I think that’s what it’s going to boil down to for any person out there who wants to effectively take advantage of this for long-term savings. Let’s make sure you’re maximizing your growth potential by getting in maximum dollars each and every year or as close as possible as you can.

It’s a part of what we’re teaching here at Pennsylvania Capital Management, and I can see tremendous connection between creating wealth through an HSA, creating wealth through a 401(k). Looking at techniques to take advantage of other asset classes, be it depreciation that you receive from investing in real estate to utilize our tax system so that we keep what we can reasonably within the current tax structure. I think there are many opportunities. This is an excellent one, and this is a key part of what we share with our clients as partners with them being that we’re a fiduciary firm and we put clients’ interest ahead of our own.

This is a great area where I think that committed, hardworking people who want to save for their future and develop their independence can move forward and make great strides. For our listeners, I just want to show you our latest book called Who’s On Your Dream Team?, and it’s people like David. And what we believe fiduciary firms around the country provide to their clients that will help people make the progress they want and really bring some stress relief, create more time so that they can spend time with those that they love and with the types of opportunities and adventures they’ve been dreaming of. David, thank you very much.

Very well said.

Thank you.

Yeah.

Thank you very much for joining us today. This has been an excellent podcast and one that I’ve enjoyed. I think it will create lots of new insights for our podcast listeners. If you have further questions, we welcome them. Thanks for tuning in.

Thank you, Irvin. Appreciate…