Podcast

Episode 6: 4 Tax Strategies As We Approach Year End

4 Tax Strategies to consider before the year ends

4 Tax Strategies As We Approach Year End

Kevin Lao 00:12

Hello, everybody, and welcome to the Planning for Retirement Podcast. My name is Kevin Lao. I am your host. I’m also the Director of Financial Strategies at my firm. Imagine Financial Security. We provide Financial Planning Services for those all over the US remotely, and also in Florida locally. If you’re interested to learn more about my firm, you can go to my website imaginedfinancialsecurity.com and very excited to bring this episode today on 4 Tax Strategies as we approach the year end.

Just a quick disclosure, this is not tax advice or, investment advice. So, please consult your own attorney, financial planner or, CPA to see what strategy is most relevant for you. But I do want to hit on these topics today. As we approach the year end, not all of them have to be done by the year end, some do. But some we have until April of next year before tax time.

So just wanted to bring these up as many of you are thinking about the holidays and spending time with family. We are thinking about how to save our clients and taxes? So, without further ado, I’m going to introduce the four concepts we’re going to discuss today and we will dive in.

The Four Tax Strategies to Consider Before the End of the Year

So, first one is Maximizing Retirement Contributions. Second is Health Savings Account contributions or, HSA contributions. Third is Tax Loss Harvesting and fourth will be broken into two sections. The first is Charitable Donations using a Donor Advised Fund and then 4B would be Charitable Donations using a Qualified Charitable Distribution, also known as a QCD.

Max out retirement contributions!

So, why don’t we start with Retirement Contributions? This is an obvious one. So things like 401K’s, 403B’s, 457B plans, even regular IRAs or, Roth IRAs, taking advantage of the maximum contribution or, the maximum you can contribute to these plans. I bring this up because I can’t tell you how many times I talked to folks that say yes, I’m maxing my 401 K plan.

I look at their pay stub and I look at their year-to-date contributions. And they are maxing the amount of their employer will match. Which oftentimes might be 3% or, 6% but they’re not maximizing their contribution, which for 2021 is 19,500 if you’re under 50. If you’re 50 or older, you can put in a catch-up contribution of 6500 for a total of $26,000 per year.

Yes, we’re in December, we’ve got probably two pay periods left to make contributions. You might have a year-end bonus. So, those are opportunities, you can essentially try to backload those contributions into your 401K or, 403B plan or, 457 plan to try to get either at the max contribution or, close to the max contribution, ok.

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Now, if you don’t have a year and bonus, if you’re just getting your buy weekly pay-checks. Let’s say you’ve got some money sitting in savings, not really earning a lot of interest, maybe 0.01% interest. You might want to consider, hey, live on that savings for a month, ok. And instead of getting your pay-check deposit into your bank account, try to contribute either all or, most of your pay-check into those retirement plans.

So try to backload and try to get closer to that maximum contribution, ok. It might be painful from a cash flow standpoint, but you’re going to take advantage of utilizing that savings, that’s not doing anything for you, and getting in into those retirement plans that are growing tax advantage, ok, don’t just think Tax Strategies being Tax Deductions.

If you have Roth options like Roth 401K’s or, Roth 403 B’s or, if you can qualify for a Roth IRA, strongly consider that. I think we’ve been trained to deferred taxes and I see many people run into what I call the Tax Trap in Retirement. They turned 72. They have all this money saved in their qualified retirement plans and they’re having to take all these distributions out, even though they don’t need it for income.

Therefore, pushing them in a higher Tax Bracket maybe paying more for Medicare premiums so, strongly consider. Does it make sense for you to use a Traditional Retirement Plan or, a Roth Retirement Plan or, a combination thereof?

No one says you have to do 100% of one versus the other. You can use combinations of both to essentially create some tax diversification on your balance sheet. But the key is, try to get as much money as you can, before you’re in on those 401K, 403B plans and then prior to April filing taxes for next year. You leverage those traditional IRA contributions or, Roth contributions, ok.

Max out HSA contributions!

All right, HSAs or, Health Savings Accounts probably, one of my favorite tools to utilize for retirement planning, and actually just wrote a blog, post on this today actually, and so if you want to read that and to learn more details about HSAs and how to utilize them? You can go to my website imaginefinancialsecurity.com and go to my blog.

Let me just explain what an HSA is briefly? And HSA is essentially an account that you’re eligible for. If you use a high Deductible Health plan, ok, so High Deductible Health plan, essentially your Deductible is going to be a little bit higher than a regular Health Care plan, ok, but you can contribute to an HSA. And you can contribute $3,600 If you’re an individual and 2021 or, 7200.

If you’re in a Family plan, and you could recognize a tax deduction for those contributions so, in my opinion, for many people, if you’re using one of these high Deductible Plans, and you’re relatively healthy, that tax deduction that you can take advantage of by contributing to an HSA. Oftentimes either washes or, put you in a more Beneficial Tax Situation than having a lower deductible.

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Obviously, you can’t predict Health Care costs. You might be paying a little bit more out of pocket in that year. But the true benefit is, you’re getting this money into this account. You’re getting the Tax Deduction for these contributions. What you can do is, you could reimburse yourself for Health Care costs. Either that you recognize throughout the year or, in future years, ok,

The growth on these assets, which you can invest in a basket of securities, like ETFs or, Mutual Funds, the growth on those assets are tax-free and the distributions are tax-free as long as you’re using it for Qualified Health Care expenses. Now, the definition of Qualified Health Care expenses is quite broad. Just do a Google search and you’ll see IRS resources, and other HSA resources in terms of what constitutes as a Qualified Health Care expense. It’s very broad. So, even dealt dental vision, routine check-ups, and surgeries.

So, the true power in these vehicles, in my opinion is, yes, you get the tax deduction today. You can use it to reimburse yourself today. But the true benefit is, if you can let that money compound long-term, ok. Particularly, to let that continue, to grow for Retirement Planning, maybe, you’re letting this thing compound for 10 years of contributions here, and you’re investing it in a well-diversified strategy and you’re growing those assets over time tax free.

You can build up a substantial nest egg to utilize in retirement, to help pay for health care expenses which is estimated in todays until 2021, a 65 year old couple is going to spend $300,000 in retirement on health care costs,

Why not spend it from tax-free buckets as opposed to— let’s say, a traditional 401K or, a traditional IRA, and you have to pay taxes on those distributions, ok. The best part about this is there’s no income phase out. Unlike other traditional IRAs or, Roth IRAs, there’s no phase out for income. So, you can get that deduction and contribute to it regardless, of what that adjusted gross income is?

Just a quick side note, a little bit different than an FSA. Many people have FSA or, flexible spending accounts available. FSA is needed to be emptied by the end of the year. So, just a quick side note, if you have an FSA, make sure you’re taking advantage of those distributions and reimbursing yourself for any healthcare expenses or, go to the doctor and do some things that you were putting off, and take advantage of those dollars in the FSA that you haven’t spent yet, ok.

Tax Loss Harvesting

We talked Retirement Contributions. We talked about HSA contributions. Now, let’s talk about Tax Loss Harvesting. It’s a somewhat complex concept, but let me try to simplify it. When you invest in a security whether it’s a Stock Bond, Mutual Fund and ETF, and these are outside of a retirement account, ok.

So, Retirement Accounts, you get the benefits of tax deferral, and if you sell anything in those, you’re not going to trigger any taxes unless you take a distribution, ok. A non-retirement account or, a non-qualified account, you could still buy those securities individually or, jointly hold them in that account, and you will either have a gain or, a loss, but you’re not going to pay any taxes until you sell that investment.

Unless there’s interest or, dividends that kick off. You’ll get a 1099 each and every year but from a capital gain or, loss standpoint, once you sell something, then you recognize that gain or, loss, ok. Let’s say you invested $10,000 and now it’s your investment is $20,000. Let’s say you sold that investment and you held that instrument more than a year. You would pay a long-term capital gain.

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If you held it less than a year you would pay a short-term capital gain. Short-term capital gains you’re taxed at your regular income bracket. Whereas a capital gain you’re either in 0%, 15% or, 20% capital gains bracket depending on what your income is. But generally speaking, you’re probably in a lower tax bracket with your long-term capital gains, than you are with your regular ordinary income.

Ok, there’s definitely a benefit of utilizing these instruments outside of retirement accounts because they’re liquid. You don’t have to wait till you’re 59 and a half and to tap into those dollars. Allows you for more contributions over and above those Max contribution accounts on your 401K or, IRAs, ok.

So, throughout the year, you might have experienced some assets that grew in value, but you also might experience some assets that lost in value if you have a well-diversified portfolio. Not everything is going up at the same rate, and some might be non-correlated to one another. If you have losses in your portfolio, you might consider actually, selling that investment at a loss to take advantage of that for tax purposes.

What you do with that loss? Let’s say, you had a $10,000 loss on a different investment and you sold it, and then you had a $10,000 gain on another investment that you sold, that would essentially wash out that that gain, and you would not have any taxes due. Now, let’s say you didn’t have any gains and you just sold something at a loss that $10,000 where you can recognize up to $3,000 as a tax deduction today, and then carry forward the rest of those that loss in future tax returns.

Ok, and in order to maintain that same exposure, and that and that investment, let’s say that investment made sense for your long-term goals. So, you wanted them to continue that exposure, you might consider selling that one, and replacing it with not the same one, but something that’s very similar has similar exposure into maybe a sector or, an area of the market that you want exposure to base on your financial plan.

It’s a great strategy to take advantage of not even just at the year end, but throughout the year. Markets aren’t just volatile in December. They’re volatile throughout the year. In times, like in the third quarter when the Delta variant first rear to ted or, now it’s the Omicron, there’s sell-offs in the market in different areas, and we’re constantly looking for opportunities, for clients that have taxable accounts, to actually recognize some of those losses for tax purposes, to either offset gains or, reduce taxable income and carry forward any losses in the future as well.

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Again, make sure you’re talking with a professional this one. There’s a little bit complexity to different rules around, what a wash sale might be? So, you really got to consult with your financial planner or, advisors before you make any decisions with your investment portfolio.

Charitable Donations!

Ok, fourth and final strategy, Charitable Donations. This is the time of year to be charitable, and so many people are thinking about the causes that are important to them. But they also might be thinking, hey, I want to donate to these causes but I also want to recognize some tax benefits. So, I’m breaking this down into two parts.

First would be Donor Advised Funds, and then the second is going to be Qualified Charitable Distribution. Donor advised fund, what is a Donor Advised Fund? It’s essentially an account that you can contribute to most financial institutions offer these and you can contribute really, any dollar amount or, even contributed securities into a Donor Advised Fund. It’s essentially a charity. Ok, that can then benefit as many charities as you’d like.

So, if you had, let’s say, a few $1,000 sitting around, you could either donate it directly to charity or, you could donate it to a Donor Advised Fund, and actually, invest those dollars in a basket of securities for future growth, and either donate to charity or, charities that year or, in years, in the future.

Here’s why this is beneficial from a tax standpoint is. Yes, if you had $10,000 you could donate it directly to charity or, you could donate it to a Donor Advised Fund. It doesn’t make a difference. However, if you are taking a standard deduction, which for 2021, if you’re single, it’s 12,550. If you’re married it’s 25,100.

If you donate to charity, and that donation does not put you above the standard deduction, meaning you’re not itemizing your deductions, that doesn’t really do anything for you from a tax standpoint. You’re not actually getting a tax deduction for it, because you already had the standard deduction that everybody else takes advantage of, ok. That takes the standard deduction.

Donor Advised Fund (DAF)

So, the Donor Advised Fund essentially allows you to front load contributions into this Donor Advised Fund to take a tax deduction now, and contribute to that charity or, charities in the future. Ok, so let me explain how that would work?

Let’s say you normally contribute $5,000 each year, but 5000 hours doesn’t put you above the standard deduction limits, so therefore, you’re not taking it. You’re actually not technically taking a deduction for it. What you might do is say, hey, you know what? I’m going to do this for the next decade.

Ok, I’m charitably minded. I’ve got some cash sitting around maybe, you sold a business or, a property or, you had a great year and you had a great income year, and you’re sitting in some savings. Maybe you take $50,000, which is 10 donations over the course of 10 years of 5000 hours per year, 50,000 and put it into the Donor Advised Fund.

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That will for sure put you over this standard deduction limit, right, give you that tax deduction today, ok. Allow you to essentially either turn around or, write a check for $5000 to that one charity, you’re going to donate to this year, and then the remaining 45,000, you can invest and actually have future growth.

Ok, if you obviously invest wisely, there’s no guarantee of future growth. But you could have future growth on that account, to even give more than $45,000 into the future to that charity or, charities. It’s also not limited to one charity. Like I said, the Donor Advised Fund can benefit as many charities as you’d like, as long as it’s a qualified 501 C3. You can’t gift to like a private foundation or, your grandchildren’s college education.

It’s got to go to a Qualified Charity, but essentially creates a lot of flexibility and allowing you to really front load those donations in a tax year. You might want to get that deduction, when normally wouldn’t have received that deduction, but also allows you to maintain control so you can give to that charity over a period of time, and actually, still invest those dollars and maintain control of those dollars for charitable purposes.

Now, I say control, technically, it’s an irrevocable contribution. You can’t say, hey, you know what, just kidding. I want to take it back and use it for buying a boat. You can’t do that. It’s got to be Charitable Fund. It’s got to go to Qualified 501 C3 organizations and if it does, you get Tax-Free Growth and Tax-Free Distributions on that Donor Advised Fund, ok.

A great tool to utilize, if you charitably minded, you’ve got some cash sitting around. Maybe you’re in a tax year or, you want to get a deduction but just writing a check to one charity is not going to move the needle for your itemized deduction purposes. So, consider the Donor Advised Fund.

Qualified Charitable Distribution (QCD)

Second strategy, Qualified Charitable Distribution. This is for those that are 72 or, older and your RMD age are Required Minimum Distribution age. So, for those of you that don’t know, when you turn 72, the IRS says, hey, you have to take a certain percentage, out of all your qualified plans. Your IRA’s, 401K’s, 403B’s, 457s, really anything that’s not a Roth IRA, it pretty much has a required minimum distribution.

Well, let’s say that $10,000 doesn’t similar example as the Donor Advised Fund. Let’s say it didn’t put them over or, doesn’t put them over that standard deduction limit. So, donating $10,000 is not going to itemize their deductions. Therefore, that 10,000 is not going to move the needle to reduce their taxable income.

So, the nice thing about the Qualified Charitable Distribution is you can donate up to 100% or, $100,000, of your Required Minimum Distribution, if you donate it directly to charity. Ok, so let’s use the example, someone is charitably minded, let’s say normally, they have to take $50,000 out for the Required Minimum Distribution, but they normally give $10,000 to charity.

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Well, if it’s coming from a Qualified Charitable Distribution, instead of taking that $50,000, for your RMD, you say, hey, go to your financial institution. Say, hey, you know what? Give me $40,000 and then the other 10,000 that I need to satisfy for this year. Donate that directly to a charity or, charities. You can name as many as you’d like.

So essentially, what that does, it satisfies your Required Minimum Distribution but that amount that you donate to charity is not included in your adjusted gross income. So, it’s essentially better than taking a tax deduction, because it doesn’t push you into a potentially a higher tax bracket and potentially could even save— it might even keep you on a lower Medicare premium schedule, ok.

It doesn’t matter if you itemize your deductions or, take the standard deduction, you would have had to take that $50,000 that Require Minimum Distribution regardless, and if you’re charitably minded, donate it directly from your IRA. And again, it has to come from a traditional IRA. It can’t come from a 401K plan or, a 403b. So, if you have this goal, you might even consider, if you’re eligible to roll those funds into a traditional IRA, and then turn around and do that QCD or, Qualified Charitable Distribution. Again, that has to be done before calendar year end.

Summary

So hopefully, this was helpful. Again, we talked about Retirement Contributions. We talked about HSAs. We talked about Tax Loss Harvesting. We talked about Charitable Donations via the Donor Advised Fund, as well as the Qualified Charitable Distribution. I hope everyone found this helpful. If you have any questions or, if you if you’re curious about, how to work with my firm again?

Go to my website imaginefinancialsecurity.com. There’s plenty of information there and how to get in touch with us. But again, hope you found it helpful. And subscribe to us if you like what you heard. Give us a five star review, if you like what you heard, and I always like to hear your feedback. Until next time, and hope everyone has a wonderful holiday season. Take care.

Kevin Lao

December 20, 2021

Should I use an HSA for Retirement Planning?

"Should I use an HSA?"

In simple terms, a Health Savings Account, or “HSA,” is an account owned by an individual that can be used to pay for health care expenses, either now, or in the future. The accounts are eligible for those who have a High Deductible Health Plan and are funded with pre-tax dollars. If the funds are used to pay for qualified expenses, the funds can also be withdrawn tax free for those purposes. If leveraged appropriately, it will be the most tax efficient vehicle you will utilize for retirement planning.

Why participate in a Health Savings Account?

Fidelity conducted a study that estimates a 65 year old couple will need $300,000 earmarked to pay for healthcare expenses. This does not include costs for long-term care services. $300,000 of course represents true expenses, meaning the funds used to pay for those expenses will be net of taxes. If the bulk of your retirement savings are held in a traditional 401k or IRA, you will need close to $450,000-$500,000 in your account balance earmarked for healthcare costs alone. Therefore, many of my clients are leveraging the HSA as part of their overall retirement planning strategy, and I’ll summarize some of the benefits in more detail below.

1. You recognize a tax deduction today.

If you are single, the maximum contribution is $3,600 for 2021 ($3,650 for 2022).
If you are married and participating in a family plan for insurance, the maximum contribution is $7,200 for 2021 ($7,300 for 2022). If you are over 55, there is a $1,000 catch up contribution available as well. Unlike other tax efficient saving strategies, your adjusted gross income level does not phase you out of a contribution. Also, you don’t need to worry if you itemize your deductions or take the standard deduction come tax time, all contributions will reduce your taxable income. You will typically have the ability to make your HSA contribution before tax time. This is helpful as you could wait until March or April before making your contribution from the previous year after you estimate what your tax liability might be. Of course, consult with your tax advisor on federal and state tax impacts of making an HSA contribution.

2. Tax efficient growth

Once the contributions are made, the growth from year to year is not taxable. Unlike a taxable brokerage account (investing in stocks/bonds/mutual funds), you will not receive a 1099 for interest or capital gains purposes. Furthermore, the distributions are also tax free as long as they are used for qualified healthcare expenses. Unlike a normal retirement account, you don’t have to wait until 59 1/2 to take those qualified distributions. We will cover what a qualified healthcare expense is later, but think about the tax power of this vehicle. All other retirement vehicles that you take a tax deduction up front grows tax deferred, not tax free. Furthermore, tax free retirement vehicles like Roth IRAs, Roth 401ks, etc., don’t allow for a tax deduction up front! Therefore, the HSA has the best of both worlds from a tax standpoint in that it’s tax deductible, and grows tax free (as long as it’s used for qualified healthcare expenses).

3. Flexibility

A health savings account can be used for current medical expenses, or future medical expenses. This means you are not required to “empty out” your HSA at the end of the year, unlike it’s cousin, the Flexible Spending Account. This means that the HSA can be used in a year where you have abnormally high medical bills (major surgery, having a child, unexpected ER visit etc.), or can be used in future years, or better yet in your retirement years. Furthermore, there is no limit on the timing of reimbursement. Let’s say you had major surgery in 2021, but had some cash on hand to pay for the expenses. Therefore, instead of taking an HSA distribution, you decided to let it compound and invest it for the long term. Let’s say 15 years later, you needed to raise some cash. Well, let’s say that surgery set you back $5,000 out of pocket, you could reimburse yourself for that surgery that occurred more than a decade ago. This feature also allows you to grow the funds over time with compounding interest before reimbursing yourself. Make sure you have a process to archive receipts, which often times can be done with your HSA provider. The final component of flexibility is portability. If you leave an employer, the HSA always remains with you. You can even roll it over to a different HSA provider if your new company offers a plan that you want to participate in.

4. Growth opportunities

Given the ability to make contributions over your working years without the requirement of withdrawing funds, the HSA also offers an opportunity to accumulate a sizeable balance that can be used in your retirement years. Additionally, you can even invest those unused funds in a basket of securities such as mutual funds or ETFs for even more growth opportunities. Typically, the HSA provider will require some reserve amount that cannot be invested, let’s say $1,000. Once you exceed the $1,000 mark, you can choose from a menu of investment options that suit your time horizon and risk tolerance.

The tax deduction up front, the tax free growth, flexibility, and growth opportunity are all reasons why this vehicle is the most powerful vehicle you can utilize for retirement savings. We already know healthcare is going to be a major expense during retirement, so why not get the most bang for your buck when paying for those healthcare expenses and leverage the HSA?!

Who is eligible?

Anyone who is not enrolled in Medicare and is enrolled in a high deductible health plan is eligible to participate in an HSA. Most of you probably won’t worry about this, but you cannot be listed as a dependent on someone else’s tax return. Some may view the high deductible health plan requirement as a downside, but most high deductible plans still provide your preventative care like annual physicals, child/adult immunizations, screening services and other routine check ups with little to no out of pocket charge. The minimum annual deductible required to qualify as a high deductible is $1,400 for individual coverage and $2,800 for family coverage. Additionally, the maximum out of pocket expense plus deductible needs to be $7,000 for individual plans or $14,000 for family coverage. These are the basic requirements for the health insurance plan in order to be eligible for an HSA. As you can see, the deductible may be slightly higher, but the tax benefits of the HSA contribution alone can help offset that slightly higher out of pocket cost. Furthermore, that tax free compounded growth on your investments makes the high deductible plan worth it in many instances allowing you to build up that retirement health care nest egg.

What are qualifying medical expenses?

The list of qualifying medical expenses is very extensive. Chances are, anything that is non cosmetic is likely a qualified medical expense, including costs associated with dental and vision. If the HSA distribution is deemed non-qualified, the funds are taxable and subject to a 20% penalty if you are under the age of 65. Here is a link to a resource that provides a list of all qualified medical expenses: CLICK HERE

Outside of the traditional list, I wanted to point out a few that might not come to mind initially.

1. Long-term care services, and qualified Long-term Care Insurance premiums.

This is monumental, given the likelihood of retirees needing long-term care. The most recent statistic is 70% of those 65 and older will need some type of long-term care services during their lifetime. On average, women receive care slightly longer at 3.7 years vs. men at 2.2 years. Given the costs associated with long-term care, it is prudent to incorporate a plan well before you retire, whether it’s buying insurance, “self insuring,” or a combination of the two. For those who decide to buy insurance, you can withdrawal funds from your HSA tax free to pay the premiums, as long as it’s a qualified long-term care policy. Traditional, stand alone, long-term care policies without any cash value features are generally qualified policies, and HSA funds can be tapped to pay these premiums. Hybrid policies, however, are a bit more complex. These hybrid policies combine life insurance with a long-term care benefit, so if you never need long-term care services, typically your beneficiary will receive some sort of death benefit when you pass away. These policies have historically been considered NOT qualified, and HSA funds could not be used to pay these premiums tax free. However, companies are now identifying what is called a “separately identifiable long-term care premium,” which would be allowable as a qualified premium, and therefore HSA funds could be used in this situation. Consult with your insurance agent and tax advisors to ensure you don’t make any mistakes here.

If you decide not to buy insurance, or you plan on buying a small policy and “self insuring” for any additional long-term care costs, an HSA is a home run tool for this pool of dollars. Long-term care services are in fact qualified expenses, and HSA funds can be tapped to pay these costs. It’s estimated that a private room nursing home is upwards of $105k/year in the US (depending on where you live). If you needed to tap $105k/year to pay into a nursing home and only had tax deferred accounts on your balance sheet, such as a 401k, you would need to make distributions in the amount of $125k-$150k/year depending on your tax bracket. On the contrary, a $105k expense is a $105k distribution from an HSA given the tax free nature of these withdrawals.

I wrote an entire article on long-term care planning. If you are interested in reading more, you can use the link HERE.

2. Medicare premiums

This would apply to Medicare part B, C and D. However, Medigap policies are not considered qualified expenses. This is important because if you build up a substantial HSA balance, you could guarantee that you will have qualified medical expenses simply by way of being enrolled in Medicare. Additionally, there might be years where your Medicare premiums go up based on your income (think selling a business or real estate property, Required Minimum Distributions etc.), and you can use the HSA to offset that increase in premium.

What happens to your HSA when you die?

If your spouse is named as beneficiary when you pass away, your spouse will take over and continue the tax benefits as an HSA. Basically, there are no changes. However, when the HSA is passed to a non spouse (adult child or other beneficiary), the account is no longer an HSA and the full balance is taxable income for that beneficiary. Nobody has a crystal ball, but if you are building significant savings in an HSA, you might want to have a process to make regular reimbursements during retirement so you don’t create a tax windfall for your heirs. Given the flexibility in the timing of reimbursements, you can very easily go back over the years and pay yourself for medical bills incurred in the past. One other final disclaimer on that note. You cannot reimburse yourself from an HSA for expenses that were incurred before that HSA was established! If you set up an HSA in 2015, you can only reimburse yourself for expenses as long as that HSA was established (2015 and beyond).

Final Word

Medical costs are pretty much a given, so why not take advantage of the IRS tax code and maximize your ability to pay for them now and in the future. If you are young and healthy, I would strongly encourage the use of a high deductible health plan combined with an HSA. If you have concerns about the higher deductible given your medical history or unique situation, simply do the math on the tax savings of making an HSA contribution vs having a slightly higher out of pocket expense for the deductible. Most HSA providers even give you calculators to help you with that math. However, the real power is in the ability to build up a substantial nest egg with tax free compounding and investment opportunity within the HSA. This will allow for you to recognize some tax relief while you are working and contributing, but have another layer of tax free distributions to supplement your retirement income. This is especially true if you no longer qualify for Roth IRA contributions or don’t have a Roth 401k/403b option available at your employer. Even if are are closer to retirement, don’t let that discourage you. You can still max out the HSA contribution every year, invest the funds in a well diversified portfolio, and have a decent account balance to pay healthcare costs in your retirement years.

Be sure to consult with your tax advisors and financial planner before making any changes to your situation. If you would like to schedule a call with me to review your situation and figure out what strategy fits in your overall plan, you can book a “Mutual Fit” meeting by clicking the button below.