Retirement Answers

Jacob: 00:02

That's what makes it triple tax advantage. You get a tax deduction on the front end, you get to take it out afterwards tax free for medical expenses, and all along the way, get to grow the account in a tax deferred manner. And this is the ultimate tax savings or tax beneficial account that you can have out there. Welcome to Retirement Answers, a podcast built to answer your most pressing retirement questions. If you're someone who's either thinking about retirement or already in retirement, well, you're in the right place.

Jacob: 00:31

Hey there, my name is Jacob Duke, and each week I'll be walking through different tips and strategies to help you succeed in retirement. So let's go ahead and get started with today's show. Hey, everyone, and welcome back to another episode of Retirement Answers. As always, my name is Jacob Duke. I'm a certified financial planner, and the purpose of this podcast and show is to help you ultimately learn and grow in your knowledge about all things retirement so that you can ultimately retire successful.

Jacob: 01:02

So if you're a frequent listener of the show, I really appreciate you being here. I hope you find this valuable. And if you have, go ahead and give us a rating and review there on the podcast app that you're listening through. And if you're new to the show, welcome. I'm glad that you're here and I really hope that you find this valuable.

Jacob: 01:17

So today we're going to be talking about the topic of HSAs and how you can use them in retirement. So I want to give you five different ways that you can use an HSA in retirement and the fifth might be one of the most interesting to you. And then also, I've got a question at the end I want to answer around what happens with my HSA whenever I pass away. So that's what we're gonna be covering today. But before we jump into those five different ways you can use an HSA, I wanted to just refresh our memory on what an HSA is and how it actually operates.

Jacob: 01:45

An HSA is a health savings account, and it's meant to be used to obviously pay for your healthcare expenses for you, your spouse, or anybody who is a dependent of yours. Now, of the biggest factors or features of the HSA is that it's triple taxed advantage. And this is what I mean, whenever you put money into the account, you get to deduct that from your income in the year in which you contribute to that account. Now there are annual limits for your contributions in terms of how much you could contribute as a single person or as a married person, but just know whenever you make a contribution to an HSA, you get to deduct that from your income. The second tax benefit is that whenever you have money in that account, it can grow tax deferred.

Jacob: 02:25

Now that brings up a point, how does it grow tax deferred? Well, an HSA can be invested much like a Roth IRA or a traditional IRA. And when you can do that, you can invest that money in whatever mutual funds or a particular investment you wanna invest in based on the platform that you're using. And then that money can grow in a tax deferred manner, much like your traditional IRA grows. And the third tax benefit of an HSA is that whenever you take money out for a qualified medical expense, you get to take that money out tax and penalty free because you're using it for medical expenses.

Jacob: 02:57

So that's what makes it triple tax advantage. You get a tax deduction on the front end, you get to take it out afterwards tax free for medical expenses, and all along the way, get to grow the account in a tax deferred manner. And this is the ultimate tax savings or tax beneficial account that you can have out there. There's no other account that has three ways that you can benefit tax free because for example, a Roth IRA, you have to pay the tax on the front end, which means no deductions, but on the back end, you get to take that money out tax free if you meet the specific qualifications to do so. Same thing with the traditional IRA, you can deduct it on the front end, but on the back end, you're gonna pay tax whenever you withdraw that money in the future.

Jacob: 03:33

So, the triple tax advantage of the HSA is one of the huge benefits that it offers. Now, it's important to remember that you can only contribute to an HSA if you have a high deductible healthcare plan. So that's important to remember because if you have a low deductible or non HSA qualified plan, you cannot go open one on your own and contribute to that legally. If you do, and later they find out that you've been doing that, then obviously all that money will become disqualified, meaning you could owe income taxes on all of it plus a penalty. So that's an HSA and a quick overview of the account.

Jacob: 04:05

Now let's dive into these five ways that you can use an HSA in your retirement to ultimately use that money efficiently and help pay for your healthcare costs. And the first way is really simple and pretty straightforward. It's that you can use it for your medical expenses. Most people would understand that whenever you get to retirement, obviously as you get older, healthcare costs and different healthcare circumstances begin to arise as you age. And so having money built up in that account for that period of time is actually really beneficial because you're not having to pull from your bank account, you're not having to make distributions from your IRAs or your Roth IRAs to pay for that.

Jacob: 04:40

You can use your HSA if you've built it up throughout your career to use it for your medical expenses. So if you're younger and you're listening to this, well, that means you should be taking some time and making the most of opportunity that you can to contribute to an HSA while you can. So that's the first way. Anytime you have medical expenses in retirement, you can use your HSA to pay for those different costs. The second way that you can use an HSA in retirement is to help bridge the gap between your age and whenever you become Medicare eligible at 65.

Jacob: 05:12

So let's say that you retired at 64. Well, means you have a year until you turn 65 and become Medicare eligible. You probably have to go buy private healthcare insurance and pay the really high premiums for that, or you could actually do COBRA for the next twelve months until you're Medicare eligible at that point. Now, is important thing to know here is that you cannot use your HSA to pay private healthcare insurance premiums, that is not allowed, but now there are two exceptions that you should know about. If you are paying healthcare coverage purchased through your employer sponsored plan under COBRA, so you left your job and then you continue to use the health insurance through the COBRA provision that's available, you can pay those premiums under the COBRA provision using your HSA.

Jacob: 05:58

So if you elect COBRA for twelve months, let's say at 64 until 65, you can use your HSA to pay those premiums for your COBRA insurance until you reach Medicare age at 65. In addition to be able to pay your COBRA insurance premiums with your HSA, you can also use your HSA to pay premiums on your medical insurance if you're receiving unemployment compensation. Now this is true at any age, but it could be really helpful for you if you lose a job or decide to stop working before 65 and you do qualify for unemployment compensation. So those are two different times that you could use your HSA to bridge that gap between Medicare age and whenever you retire, if you're retiring before 65. And obviously, if you retire before 65 and you have to go buy private insurance and you're not on COBRA and you're not unemployed and not receiving unemployment compensation, you may have to go buy a private insurance on your own and the premiums are gonna likely gonna be high, but when you do this, maybe you can strategically do it in such a way that you have the highest deductible plan, which ultimately means out of pocket, you might have more cost, but your premiums ultimately would be lower.

Jacob: 07:07

Therefore, you can use your HSA to pay those out of pocket deductibles or out of pocket maxes instead of having to pay higher premiums every single month, perhaps if you're not using your insurance frequently. So that's number two, you can use your HSA to bridge the healthcare insurance gap until you get to Medicare age. The third way that you can use an HSA in retirement is to actually cover the Medicare premiums for Part B, Part D, and then Medicare Advantage premium. So in 2023, Part B premiums for Medicare are $164.90 and Part D premiums are $32.74 But every year they're gonna be changing and knowing that you can use your HSA to pay those premiums year after year after year is really beneficial. Now, one thing to know here is that Medigap or Medicare Supplement, those premiums cannot be covered using an HSA.

Jacob: 08:01

That is one exception to this rule. So your Part B, your Part D, and then Medicare Advantage or Part C, those are all eligible to be paid with your HSA. And then obviously any deductibles or out of pockets that might come on any of those different policies, your HSA can be used to pay those as well. Just remember that you cannot use your HSA to pay your Medigap or Medicare Supplement premiums, but regardless having the option to use your HSA to pay your healthcare premiums throughout your retirement is a really big deal because if you have your premiums paid for and you also have your deductible, which is really small with Medicare, all those covered, then you're not paying really much at all for out of pocket insurance coverage ultimately throughout your retirement. So remember this benefit when it comes to Medicare and using your HSA to pay those premiums.

Jacob: 08:47

The fourth way you can use your HSA to cover medical costs in retirement is by covering your long term care expenses. And this can be done in two different ways. The first is that you can use your HSA to cover part of the premiums for your long term care insurance policy. Now, what's important to understand here is that you can do this at any age, but the amount that you can use from your HSA to cover parts of the premium is actually gonna be increasing as you get older. So that's the first benefit.

Jacob: 09:14

If you have a long term care insurance policy, typically those premiums are not very cheap, and if they are cheap now, well, they're gonna be increasing probably very soon. So you can use your HSA to cover premiums on that particular type of insurance, but most of the time you're not gonna be able to do that in full, and every year you're gonna be able to use your HSA a little bit more to cover slightly more of those premiums. Now, the next way that you can use your HSA to cover long term care expenses is actually covering the service itself of long term care, and there's a couple different ways you can do this. Well, you can do in home care, or you can do at a facility or nursing home. A couple of nuances here, and I'm not going to dive into all the different regulations and things that you have to know.

Jacob: 09:55

Maybe that's a different episode for a different day, but just really quickly, if you are going to try to use your HSA to cover in home care expenses, there are two things that must be true in order for that to be a qualified medical expense. The first one is that you must be chronically ill, and the second is that you must be prescribed by a licensed healthcare professional that you need to have somebody there to take care of you, or at least assist with you, right? So both of those things have to be true. And obviously a doctor or a licensed healthcare professional needs to make a ruling on that in order to get you the opportunity to use your HSA to cover those different costs. You can also use your HSA to cover payments for inpatient hospital care, and then also payments for residential nursing home care for different medical reasons.

Jacob: 10:41

Now, it's important to remember for this particular one here, that the main reason that you have to have this type of care must be medical. If you're not in there for a medical reason, then only the medical expenses would be qualified as distributions from your HSA. So using your HSA for long term care expenses, whether that be insurance premiums or the actual care itself is an option and an opportunity for you to use your HSA at that point. And so, like I said, building up your HSA before you get to retirement throughout your career is gonna be something that you're gonna be able to benefit from for you and your family down the road whenever healthcare costs begin to rise as you get older. And the fifth way that you can use your HSA in retirement is actually be able to take money from it for non medical expenses.

Jacob: 11:26

And there's a couple of things to pay attention to here, but this is one of my favorite ideas around how to use an HSA throughout retirement. So in order to do this, you have to be aged 65 to take money out for non medical expenses and avoid the 20% penalty for taking things out for a non medical expense. So what that means is if you take money out of your HSA for a non medical expense before age 65, then you will have to pay your tax at the state and federal level, but then also you're gonna have to pay a 20% penalty for taking that money out for a non qualified medical expense. But once you reach age 65, you can take money out regardless of what were you using it for, and then ultimately only pay the state and federal taxes, avoiding the 20% penalty for taking it out for a non qualified medical expense. So ultimately what this means is, is your HSA is kind of just turning into a traditional IRA once you reach age 65, adding to your retirement savings.

Jacob: 12:23

So let's say that you're fairly healthy and you'd really don't have many health concerns or don't expect any here in the near future, and you have a really substantial balance in your HSA, and you're like, Hey, I wanna buy a new truck or buy a new boat or whatever it is. You can use money from that, use it like a traditional IRA, pay your state and federal taxes on it, and then you're not paying a 20% penalty for using it in a non medical expense. So I hope that these five different ways to use an HSA in retirement just remind you of something that you maybe already know, or give you new ideas around how you can use your HSA in retirement. Now, I wanted to end today's episode by answering a that I got asked recently, and I was like, you know what? I probably need to look that up and research it a little bit so that I can give a clear answer on that.

Jacob: 13:05

So the question came to me and said, hey, Jacob, what happens to my HSA whenever I pass away? You know, this is not a retirement account technically, and it doesn't have RMDs. So whenever you're living throughout your life, you have an HSA with, you know, $10.15, $20.30, dollars 50,000 in it, whatever it might be, there's never a required minimum distribution from that account. So what is the protocol or what's kind of what happens whenever someone passes away and leaves an HSA to a spouse or a child or someone else in the future? And this is a great question.

Jacob: 13:37

So let's go ahead and walk through the answer. So if your spouse is named as the beneficiary, they will assume the HSA as their own upon your death. So nothing changes, there's no RMDs, they don't have to distribute that account out, they don't have to like do anything else with it, they can just say, hey, that's my account now, and now I can use that for all of my medical expenses as they come up or anything else I'd like under these different provisions I've already mentioned, especially being, you know, number five, where you can use that for non medical expenses if you'd like to once you're age 65. So if you're a spouse, you just assume that that HSA is now your own. Now, if you're a non spouse beneficiary, then the HSA value on the date of death will be reported as a taxable income to the beneficiary in that year.

Jacob: 14:21

So that person, the beneficiary will receive a $10.99 showing a taxable amount that they now have to pay taxes on, and they simply need to take all the money that's in the HSA out and they can do whatever they'd like with it. Now there's no 20% penalty for being non medical expenses. This is acting a lot more like a traditional IRA, but they're not having to follow the ten year distribution rules under the Secure Act. This is gonna be a one time distribution that happens in the year of death of the person who left that HSA to them. So you can see that there's two different, I guess, kind of rules there in terms of how HSAs are are passed on to the next person.

Jacob: 14:57

If you're a spouse, you can just assume that that HSA is now your own and use it for your own expenses however you would like. If you're a non spouse and you receive an HSA, the value on the date of death is what will be reported as taxable income to you that year. So you're gonna receive that October, you simply need to take all that money out and reserve obviously some of it for taxation based on your current income tax rate. And remember, there's no 20% penalty for taking that money out for a non medical expense because you're being forced to take it out. So I hope this episode on HSAs has been helpful for you in terms of ways that you can use your HSA to bridge the healthcare gap or the insurance gap between when you retire and Medicare age at 65, how you can use your HSA to pay Medis Part B, D, and then Medicare Advantage.

Jacob: 15:41

Remember, you can't use it for Medigap, and then also how you can use it for long term care and the different things that come into play there. And then ultimately, one of the favorite things that I like about it is that you can use this money almost as a traditional IRA once you're 65 or older. Remember, you're gonna pay the income taxes on it, but you don't have to pay that 20% penalty. So if this has been helpful for you, I encourage you and would appreciate it if you give the show a rating and written review there on the podcast app that you're listening through. And as always, thank you for listening to this week's episode of Retirement Answers.

Jacob: 16:12

I look forward to talking with you again really soon. Hey, it's Jacob again, and I wanted to extend a quick offer to you. If you have a question and you would like to have it answered here on the show, please email me at jacobretirementanswers dot net. And I'd love to answer that question for you right here on the show. Also, wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice.

Jacob: 16:37

Retirement Answers is for educational purposes only. Thanks for tuning into this week's episode. I look forward to talking with you again next week.