In the classroom today, Clay Malcolm elaborates on how you can use 2 HSA accounts so that you have 1 for liquid or short term use, and the other as an investment.
Discover all the benefits of investing in your HSA accounts, including the many tax advantages.
Mike: Welcome back to the FlipNerd.com REI Classroom where experts from the real estate investment industry teach you quick lessons to take your business to the next level. And now, let’s meet today’s expert host.
Clay: Hi, everyone, and welcome to the REI Classroom. My name is Clay Malcolm with New Direction IRA and today we’re going to be talking about HSAs and the way that you can maximize their benefits.
Mike: This REI classroom real estate lesson is sponsored by VirtualStaffNow.com.
Clay: As you may or may not know, HSAs are a bit of a revolution when it comes to taking care of a person’s lifetime medical expenses. The tax benefits and properties of the accounts are unusual in as much as they are the next generation of things that have been going on in the past. Like, let’s say a flex-spending account or a health reimbursement account. The tax benefits are these: when you make contributions to the HSA, it’s pre-tax, similar to a traditional IRA. While the money is in that HSA, it’s tax deferred so if that money gets invested and makes earnings, all that is tax deferred. And then, when you take a distribution for a qualified medical expense, it’s also tax-free on the way out like a Roth IRA. So actually, the tax benefits take the best of both a Roth IRA and a traditional IRA and put it in one.
The money that you contribute to an HSA is over and above anything that you would be contributing to your retirement account and the ability of that account to persist over time and to be in that tax-deferred state really gives you a couple of advantages. And the two-HSA strategy that we’re going to talk about today really tries to maximize those two benefits. Benefit number one, of course, is any qualified medical expense that you’re going to end up paying, certainly if you just run it through your HSA, you already save the percentage that is your income tax rate. Right, because it was pre-tax money in and tax-free on the way out, so you never pay tax on that money so you save whatever your tax rate was and that’s tremendous.
And in a lot of cases, somebody will keep an HSA that is very liquid, usually with a bank or an insurance company that has a debit card and as much convenience as they can provide. But a lot of those types of providers don’t allow that money to be invested so it’s static. But in that particular HSA, one might keep the amount of money that makes them feel comfortable if a medical event should occur. So maybe that’s a half a year’s deductible, or two year’s deductible, or a year. It really is up to the account holder. And keep in mind that your HSA is completely under your individual control, not your employer and not your insurance company.
Now the second HSA as part of the strategy is the long-term. So you can have as many HSAs as you want so what a lot of folks will do is once they have that liquid HSA that has a comfortable amount of money in it for them, they will keep making contributions, they’ll open a second HSA at a provider that allows for investment and they will keep moving money over there. No tax, no penalty to make that transfer. And they will invest that for the long run because any earnings that that HSA makes can eventually still be distributed tax-free for qualified medical expenses.
So not only can you take care of your medical expenses in the here and now, but also a lifetime’s medical expenses, which may free up your IRA money in retirement to buy a boat or take a trip or do something fun for your grandkids. So the properties of the HAS, in a lot of cases, can be maximized most efficiently with two HSAs, one for the here and now, and one for the long term. Thanks for joining us on the REI Classroom. I’m Clay Malcolm.
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