Uh, you want to fight over one? Oh, goodness, I thought that last one would be one we’d fight. No, this was one we’re gonna fight on. All right, this is what Alex said: Roth IRA or HSA. I can only fund one. He or she already knew where you were going. Which should I fund first and why? I’m 30 with a wife and I have three kids, so medical expenses are a sure thing in the future, but wanted your opinion.
Oh man, this one is… It’s less of a fight in me trying to balance my desire to minimize taxes in the current versus minimize taxes in the long term because of the value of compounding growth. Um, oh man, because I still want to say both. Just do both, you know, go figure out a way to do both, but no. I mean, but it is… I think that so I’ll answer it in this way.
Is that you know, look, we know 96% of people who use health savings accounts use them as annual clearing accounts meaning that you put the money in, you get the current year tax deduction, you pull the money out, and you actually use it to pay your medical expenses. That’s novel, that’s good. And if you’re tight on money, I think that’s understandable. There is a bonus level status if you can actually invest the HSA money to let it grow, but with somebody with three children in the house that’s too hard to do. So that current year tax deduction, so I’m actually talking myself into a different answer here is because I think somebody with three children and you can’t afford to do both, your money is tight. I mean, you’re probably thinking, what, how do I prioritize the money? You’re probably not in a high tax bracket at that point. If money is tight, that means you’re not in a high tax bracket. So if that’s the case, I’m back to feeling like that Roth might be because the money of what it could become later is so much more valuable as taxes go up. You know, is the government spending more money that could come into play, but since there’s probably not a great current year tax benefit to either the HSA or the Roth on what you’re having to pay your taxes currently, so because there’s no tax deduction, you’re looking at me like I have three eyes and you’re gonna have a different opinion.
I will see your answer and I’ll raise you a slightly different answer because you said one of the things you love is a tax regrowth. Well, I’d argue inside of an HSA, you get that same thing. So you also get a current year tax deduction. So that’s to me, that’s where it gets edged out, right? That’s where it gets edged out because if I put the money in the HSA, I get my tax deduction now, well, I can invest those dollars and they can grow and grow and grow and grow all the way to retirement, and if I have medical expenses then or if I’ve been tracking my medical expense, I can pull it out tax-free. So I get to treat it the exact same as I get to treat the Roth IRA with the caveat it has to be for medical expenses, but I did get a benefit on the front end, so for me, the HSA edges it out.
Now, Brian, you said something interesting, but you’re probably in the 10 to 12 tax bracket at that point. Well, 10 to 12 percent of tax savings is better than zero tax savings. Fight me on that. That’s 100, right? But here’s the same thing, you just say that I think is a little financial mutant hack. And I want to think through this, but I think this would work. You said, “Hey, if you got three kids, there’s a chance you’re kind of having to use that as an entry your slush fund anyways. If you’re gonna do this and you’re someone who has at least $5,000 of medical expenses every year anyways, one thing I might do is I might put the money in and then reimburse myself. And then, if I have something left over, then I’m going to go max out the Roth.” So, that was kind of, I get it, you brought it full circle. That’s what I still was going to close it out and say, “At the end of the day, I want them doing both. I want you to figure out what you can squeeze in lifestyle or side hustling. If you could do it, and I love what you just did. You brought it full circle. Go take the current year tax deduction, use it as a clearing account, but then figure out a way that that reimbursement from your health savings account is funding your Roth IRA. Man, that’s good stuff. That’s good. I like that. I like that we did that live on camera. I was super nervous that wasn’t going to work well.”