What is the Most Strategic Way to Utilize Your HSA?

June 17, 2023

In this highlight, we discuss the most strategic ways to reimburse expenses from an HSA in retirement.

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When is it most strategic to reimburse expenses from an HSA in retirement? More tax-free growth is better, but I’m not sure if there are potential estate planning issues if we wait too long to reimburse ourselves. I know last week, Beau, you had a lot of raving about the HSA, so now Brian’s here, you guys can answer this together. He hasn’t seen that highlight clip. I went in hard because you weren’t here to defend yourself, and it was awesome. Um, so great question, and me and Brian, because we’re super nerdy, we had this question one time too. Hey, okay, what if we accumulate all these health savings expenses and we accumulate, and then we die? Does all that tax-free money go away? Does that mean it’s not there? No, that’s not the case. We actually verified that a decedent’s estate, the person who passed away, can receive those tax-free distributions to reimburse for those expenses. So that’s not a concern like it was.

So, the question is, then Brian, when’s the most strategic way or when’s the most strategic time to pull money out of your health savings accounts? Well, you know, when we talk about… This is sort of like generalized advice. We talk about the accumulation phase. When you think about the Financial Order of Operations, Brian, you want to hold the thing up for me real quick? When you think about the Financial Order of Operations, the way that you generally fill the bucket is you put your tax-free stuff in first. You start with Roth IRA, and then you do your employer stuff, save the match. I know free money comes first, but you do the tax-free stuff, and then you do the tax-deferred stuff, and then what goes on top is the taxable stuff.

Well, generally speaking, and this is very generalized, when you get into retirement, when you get into the deaccumulation, you pour it out the way it would naturally come out. The taxable stuff comes out first, then the pre-tax stuff comes out, then the tax-free stuff comes out at the very end. So, I would argue the best time, if you’re thinking about maximizing and optimizing growth for your HSA assets to come out, is as late as possible, as long as you can wait.

Now, the caveat I’ll throw out there is, generally, as we age, when we get to retirement, remember, when we get to age 60, 65, 70, 75, we naturally have more healthcare expenses. That’s just the way that life works. And so, if you have this pot of money that’s there to pay for healthcare expenses, and you also have these 401(k)s and these IRAs, these taxable accounts are also growing. I don’t think it’s crazy, when you get into retirement, to pull that money as needed, start pulling it out to reimburse yourself as it’s needed. And then, if you just find out that you’re healthy and you’re not accumulating enough expenses and your account’s so big, well then, yeah, maybe you need to have a strategy to figure out when to pull those tax-free dollars out.

But my very long answer to this very short question was, I think, in retirement, you can pull out the HSA dollars when you need them as you accumulate expenses. Well, it’s like all things financial planning. It’s very nuanced. And the fact that I think, while, because you said it earlier, is that the optimal strategy, the maximizing strategy, is just let the money work as long as it can. So, truthfully, you wouldn’t even get the benefit. It would be your heirs, but that’s not ideal. So, because I wrote down some quick notes on “get wealthy” versus “stay wealthy.” I think that while you are in the wealth-building journey, yeah, you want that money growing and building. Assuming you have the cash flow, the ability to front and pay those medical expenses, and track all those receipts, you should do that. That’s why I’m letting my money just build up in the background. I’m investing, letting it grow through all this volatility. But then there will come a point, this is what Beau is alluding to, to the “stay wealthy” side where now you need to allocate your resources well. Now, let me give you a few examples.

Fidelity every year offers what health, how much medical expenses are likely going to cost retirees. It’s something we cover in a lot of our content. It’s high, it’s a few hundred thousand dollars. How much health care will cost? Well, yeah, medical expenses, yeah, it’s a lot of money. So, I mean, a lot of people say you will get to a point, but also there are some unique things that happen in retirement. The fact that you can do Roth conversion strategies, there are some really cool things that come down the pipe that you’re like, “Oh, hey, why don’t I see if I can turn some of these tax-deferred assets into tax-free assets?” Because the reason that’s the last thing that falls out of your pots of money is because that has great long-term legacy planning opportunities as well, because it’s growing tax-free.

So, that might come when you’re looking at all your pots of money and you want to allocate well. You might look at that HSA and think, “Man, I have a ton of receipts. I’ve had tons of time for that money to grow. I could reimburse myself and still have a lot of money left over in that account to keep working.” You’re going to know that the optimized best dollar to use is that HSA dollar. Or, you actually get into retirement and those, you know, quarter of a million dollars of expenses are starting to pile up, and you’re like, “Man, this is… I am going to go ahead and start using this account because this is the time to use it. It’s tax-free, it’s for medical expenses. This will be great to maximize that compounding.”

That’s the way I look at it. All money is nuanced, and the fact that you really need to kind of put your mindset as, “Am I in the ‘get wealthy’ phase?” And then your mindset will change once you stay wealthy because they’re not related to each other completely. Because realize, eighty percent of millionaires are first generation. And then, but this is where I’ll have this conversation with my oldest daughter all the time, but it is so sad that seventy percent of that wealth that was created in the first generation is gone by the kids. Ninety percent of the wealth is gone by the grandkids. So, this is a natural cleansing process that occurs with wealth. That “stay wealthy” needs to be paid attention to.

Well, and that’s why these things… I know this was an HSA question, but it is highly integrated into, are you in the “get wealthy” phase, are you in the “stay wealthy” phase? Because that will play out how you will disperse that health savings account. If you’re using the four percent strategy, where you’re actually not reimbursing yourself every year, that you’re actually putting this money to work, that comes into play. For more information about taking your relationship to the next level, check out out work with us page.



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