Introduction
I’d like to introduce you to, Greg Phelps, a new friend and fiduciary with 22 years of financial planning experience. He runs the Wealth Summit–a platform created to help consumers better understand their personal finances. At this year’s no-cost, online Summit, Greg will interview 30+ money experts who will expound on their strategies to help grow, protect, and maximize finances. Topics will include Social Security claiming strategies, Medicare management, budgeting, investing, asset protection, Reverse Mortgages and more. You can see my interview snippet at the bottom of this article.
Below is a shortened written summary of one the Summit Interviews Greg did with Garrett Prom,. CFP from Austin, Texas. Hope you enjoy.
Health Savings Account: An Interview with Garret Prom, CFP®
Many investors haven’t explored (or accepted) the Health Savings Account as a viable retirement savings vehicle.
The current Health Savings Account (which Greg calls the “medical IRA”) provides a tax deduction when you fund it with a family contribution limit of $6,750 per year (2017).
If you’re in the 20% tax bracket, you’ll save $1,350 in taxes right off the bat.
The HSA contribution limit grows with inflation over time. The following graph allows for a 2% per year contribution max hike for inflation. While the contribution limits don’t change every year, they do increase over time. Assuming an 8% annual growth rate, that $6,750 contribution each year (about $560 a month) increased with inflation turns into more than 1 million dollars after 30 years.
If you invest $6,750 per year for 30 years at 8% and grow your yearly contribution at 2%, you end up with over 1 million dollars.
Tax Benefits
First, you must meet the eligibility requirements in order to qualify for a Health Savings Account.
Once you know you qualify for an HSA, fund it each year. In this case, you fund it with the family maximum and increase it every year the IRS allows. Next year, the HSA maximum jumps to $6,900.
If you’ve got a family, chances are you’re paying for doctor visits, eye glasses, or even braces. That adds up. Most people fund their HSA never even considering the retirement benefits our tax code allows. When they incur medical costs, they simply swipe their HSA debit card or submit a receipt for reimbursement.
That’s the mistake! Wait to use your HSA.
The Health Savings Account has no time limit on reimbursement. You could hang onto those receipts for 3 decades and still use them as expenses for HSA qualifying withdrawals.
Like the Roth IRA, you can use HSA distributions to slash your income tax by better managing your tax brackets in retirement. We diversify our investment portfolios, why not diversify our tax base?
The key to the HSA is to save your receipts. Don’t turn them in for reimbursement, don’t swipe your HSA debit card. Save the receipts and use them as a source of retirement income later.
What if you don’t have 1 million dollars of medical expenses?
Great question. Not everyone has massive medical expenses throughout their life.
Let’s say you executed this strategy from age 35 to age 65 and you now have a million dollars in your Health Savings Account. Let’s also assume you only accumulated $300,000 of medical expenses ($10,000 a year is a reasonable amount for an active family).
This ends up being about the same as funding your deductible IRA. After age 65 you can take HSA withdrawals for any purpose! You only have to pay ordinary income tax (no penalties).
Excerpt of Don Graves’s Wealth Summit Interview
Don Graves, RICP®, CLTC®, Certified Senior Advisor, CSA®
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Categories: Advisors, Financial
Tags: Health Savings Account, Wealth Summit
