The Most Powerful Retirement Account That Is Being Underutilized

Troy Sharpe: I’m going to tell you today what I believe is the most powerful account, even more powerful than a Roth IRA that you can have in your retirement toolbox. We’re going to cover the contribution limits, the caveats, and what you should know in order to take full advantage of this account. [music] Troy: Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, certified financial planner professional, and host of The Retirement Income Show.

Most of you know by now that the Roth IRA, whether you’re making contributions into it or doing conversions is an extremely powerful account, but there are some limitations to the Roth IRA. How much income you can earn before you are disallowed from contributing, you have to pay taxes on any conversion or pay taxes on any dollars that you put into it. Of course, they’re tax-free forever. I’m going to tell you about an account that is even better than the Roth IRA, has more tax advantages, and is available to anyone who chooses to open one. Just a quick second to remind you to subscribe to the channel and hit that bell icon so you can be notified when we’re going to upload more powerful retirement content to help you keep more connected to your money. Also, comment down below, we love to see the comments. I’m talking about a Health Savings Account, not only is this account one of the most powerful, if not the most powerful account, it’s also one of the most underutilized.

People don’t make their full contributions, many people don’t even have an HSA and many people have maybe heard of it but never opened one or never even heard of it. What exactly is the HSA? An HSA is a Health Savings Account, it doesn’t matter how much income you earn, if you make 300,000 a year or $25,000 a year, you’re eligible to contribute to an HSA. There are no income limits.

What makes them very powerful is the money that you put into them, you get a tax deduction today. That’s income you don’t have to pay taxes on. The money inside those accounts can be invested and can potentially grow into much larger sums down the road, but then when you take it out, it’s all tax-free. Let me say that again. Now, there are some caveats, but you put the money in, you get a tax deduction.

There are no income limits to what you can earn that will disallow you from contributing. The money will grow as it’s invested and when you take it out, it is tax-free. By virtue of its name, the Health Savings Account, they’re designed to help you pay health expenses during your lifetime. As we go through retirement, we know that the proportion of our budget that is eaten up by medical expenses increases as we age typically, that’s what makes this account so powerful. Not only is it growing tax-free, but we can take it all out tax-free as long as you’re using it for medical expenses. What are the limits? This is an article from Kiplinger here. If you are yourself only or you have a family, you can contribute 2022, $3,650. If you have self-only coverage or if you have family coverage, $7,300.

If you’re over the age of 55, you can put an additional $1,000 into the HSA. Now, the primary caveat here is that you have to have a high deductible health plan. We’ll talk about what that means in a second, but if you have no health insurance coverage, you can’t open an HSA. If you have a low deductible health insurance plan, you cannot open an HSA. Typically, these are going to be for someone who, one, can either afford the out-of-pocket maximum or they can afford the higher deductible. If you’re in the middle of your career, starting your career, at the end of your career, wherever you are if you’re making good money, this is a strong, strong account to consider. Of course, your personal situation may dictate what that decision ultimately is, but this is, as I said, one of the most underutilized accounts in the entire world. Oftentimes, when we’re doing a discovery meeting or an analysis meeting with the client or prospective client, we see they don’t have an HSA, or maybe they have it but they’re not fully maxing it out. These numbers over here are 2017, ’18, ’19, et cetera. We can see the amount of money that you can contribute to them has increased, so typically these go up.

Catch up contribution has remained the same. Here are the minimum deductibles to qualify for a high deductible health plan because this is the primary caveat. 2022, if you’re self-only coverage, $1,400 is your deductible, on family coverage $2,800. Limits on out-of-pocket expenses, 2022, $7,050, family coverage $14,100, so these are the limits on the out-of-pocket maximum that you’ll pay if you have significant health expenses. HSAs, in order to qualify, you have to not only have a high deductible plan, but that plan has to have limits on the maximum amount of out-of-pocket expenses that you can pay.

This includes deductibles, co-payments, and other amounts, but it does not include the premiums. If you look at 2022, the limit for out-of-pocket, the maximum expenses that you can have with your health insurance policy, $7,050 or $14,100 for a family. Part of having a high deductible health plan means not only do you have a higher deductible but you’re typically going to have higher out-of-pocket maximum costs.

If you’re someone who never goes to the doctor, someone who rarely goes to the doctor, in good health, really, it’s a very powerful tool because it’s unlikely you’ll hit these out-of-pocket maximums and therefore you can get the pre-tax deduction of the HSA contribution, grow tax-free, and then have that money available to distribute tax-free when you take it out later in life when you actually are more likely to incur health expenses, but, again, the money we put into this account it grows tax-free and you also get a tax deduction upfront. There’s no other account where you put money in, get a tax deduction today, it grows tax-free, and you can take it out tax-free to help pay for your health care expenses.

You have to decide the high deductible plan versus the Health Savings Account, which one makes better sense for you given your medical situation. Please, if you are not aware of this account, it is an extremely powerful account. You want this in your arsenal in retirement, because, down the road, we can take all that money out to help pay for medical expenses, and this covers everything, prescriptions, co-pays, everything that you can think of health related. It’s a tremendously powerful account. If you don’t have an HSA, or if you have one and you’re not fully maxing it out, take this information to heart, make the decision that’s best for you, but just be aware that these accounts are extremely powerful. I believe the most powerful account that you can have in your retirement toolbox, even more so than Roth IRAs. Take a minute to subscribe to the channel.

If you want to be updated when we upload more content like this to keep you more informed and connected about your retirement, you have to hit that little bell icon, and we’d love to see the comments down below. I try to respond myself as often as I can. Comment down below, let me know what you think, and if you have an HSA. [music]