Can I Roll Over an IRA to an HSA? (ft. Chase Rose)

Did you know an HSA could be the ultimate secret weapon for your health and wealth? In this episode, Josh is joined by Associate Wealth Advisor, Chase Rose; The guys dive into what makes a health plan HSA-eligible, how much you should contribute, and the powerful tax advantages that come with it. Tune in as the guys break down the limitations and benefits of HSAs to help you maximize your savings!

For the full transcript, links, and resources, visit theinvesteddads.com/222

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Transcript

Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better.

Josh Robb:

Welcome to The Invested Dads Podcast. I am Josh Robb, Director of Wealth Management here at Hixon Zuercher Capital Management. And joining me today, you may notice a little different intro. Austin is out. And so, joining me is Chase Rose. He's an associate wealth advisor here at Hixon Zuercher Capital Management. I'll give him a quick second to introduce himself, but he's going to talk about one of his accounts in the world today, which is HSAs. But first Chase, tell us a little bit about you.

[0:38] - Chase Rose Introduction 

Chase Rose:

Yeah, thanks for having me here, Josh. So, as he mentioned, I'm a associate wealth advisor here at Hixon Zuercher Capital Management. I've had the pleasure of sitting in many meetings with Josh Robb during my time here. I started in January of 2022, right before the most recent bear market. So, it was definitely an interesting time period to learn about this industry. But during my time as a wealth advisor, I've really grown to love the concept of a health savings account. And so, when I was asked to be on podcast, I think this was the one thing stuck in my mind that I really wanted to talk about. So, if you've been a listener of this podcast since the beginning, I know I've listened to as many as I could since my time here, you probably already know what an HSA is. So, I'll pass it back to you and I'll let you start with really describing what that is.

[1:25] - What is an HSA? 

Josh Robb:

Yeah. HSA, which you said the full, health savings account. So that's the short for a health savings account. And really what this is it is designed as an account to help you pay for medical expenses. In a way it's designed to motivate, give you an incentive to save ahead of time. And so, the IRS has given it what we call triple tax advantage. And so the three triple tax advantage is one, you get a deduction when you put money in. So, if you take money from your bank account, from your paycheck, put it into an HSA, you get to deduct that on your tax return. While it sits in there it grows tax-free, so you don't pay any tax on the growth. And then if you use it for medical expenses, whether it's in that year or in a future year, you don't pay tax on the withdrawal.

So triple tax advantage is the most efficient tax savings you have in any vehicle. So it's a great way of savings and again, it's done as a way by the government to say, hey, they're a large medical cost. If we can find a way to encourage or motivate you to start saving ahead of time, more people will have the cash available when they hit those medical expenses.

Chase Rose:

Yep. The IRS is never going to incentivize you to do things it doesn't want you to do.

Josh Robb:

Right.

Chase Rose:

So, they've definitely placed an emphasis on this HSA because really health expenses can be one of those things that really bites you in the butt if you're not prepared for it.

Josh Robb:

Yep. And when we talk about saving for emergencies, you have an emergency account. This is just another way to save for potential emergencies down the road and maybe not even an emergency. You could use your HSA for any medical expenses. So even doctor's visits, ongoing things, you could use it this. The other side of it is you can also invest an HSA. And so if you say, I don't really need it right now, you could invest it within that HSA account and try to grow it so you have more money down the road for future medical expenses.

A couple caveats, you can use this actually for other things once you are past age 65, it turns into in a sense an IRA where that if you do pull the money out for non-medical expenses, you just pay tax on it, on that withdrawal, kind of like other IRAs are. So, you're not penalized for using it for other things, you just have to pay tax for it. So that's another advantage, is they give you some flexibility there. So those are a couple things about the HSA. Chase, tell us a little bit about eligibility. There's some rules because the IRS says, hey, we don't want you to just go crazy and throw all your money here. So, they put some restrictions on it. So walk us through that.

[3:49] - Limitations of a Health Savings Account 

Chase Rose:

Yeah, sure. So a couple of limitations that apply to the health savings account. One, you have to be enrolled in a HSA eligible health insurance plan. And really what makes your health insurance plan HSA eligible is you have to meet the annual deductible requirements. So you have to be in what's called a high deductible health plan. And what makes a plan high deductible is if your annual deductible is at least $1,600 for an individual or $3,200 for a family plan. So that would meet the criteria of a high deductible plan. And there are also limitations on the upside. So, if your maximum out of pocket costs exceed $8,050 for an individual or $16,100 for a family, if your max out-of-pocket exceeds that number, then you actually are not eligible to contribute to the HSA as well.

Josh Robb:

Yeah.

Chase Rose:

Oftentimes people refer to a high deductible plan, but the max out-of-pocket does apply to some people as well. And then of course, as with all things tax related, the IRS does impose limitations on how much you can contribute to the health savings account. So for an individual, that annual limitation is $4,150. And of course, as with the other numbers, it's doubled for the family plans. So, 8,300 and then luckily if you're over age 55 can contribute, the additional catch-up contributions is $1,000 per year. So, if you're an individual and you're over age 55, you can do 5,150 times two for the family plan if you have two individuals contributing, so. And the last thing, the last limitation is oftentimes, well actually most people are contributing or paying into the Medicare plan while they're working. And so the other caveat on the health savings account is that if you have enrolled into a Medicare plan, you are no longer eligible to make contributions. So, with that being said, I guess, yeah, those are the limitations on the HSA.

Josh Robb:

One thing about that $1000 catch up, if you only have one HSA in a family plan, you can only do $1,000, not for both of you. You each have to have your own HSA for that. So that's just one of those weird rules which I never understood is you're both eligible, but if you don't have your own account, you can't do the extra $1000 for the second person.

Chase Rose:

There is some math that goes into realizing, okay, what's my actual contribution limit this year?

Josh Robb:

Yep.

Chase Rose:

So yeah, certainly.

Josh Robb:

All right, so that's the HSA, what it is and why we like it. So we're going to spend some time talking about some other ways of funding the account, but before we do that, Chase brought a dad joke that he wants to share. So we're going to do that and then get into a couple kind of nuanced ways of funding it outside of just putting money in from your bank account.

[6:33] - Dad Joke of the Week 

Chase Rose:

Yeah. And I will say I did run this dad joke by Austin, so it is Invested Dads,-

Josh Robb:

Approved.

Chase Rose:

Approve.

Josh Robb:

All right.

Chase Rose:

So this is what I got. All right. Two fish are in a tank.

Josh Robb:

Okay.

Chase Rose:

Okay. One turns to the other and says you have any idea how to drive this thing?

Josh Robb:

In a tank.

Chase Rose:

Yeah.

Josh Robb:

Okay. Because you first think fish tank, but you're like, oh, what are they doing in a tank?

Chase Rose:

An army tank.

[6:55] – How Much Should You Contribute to An HSA? 

Josh Robb:

There you go. I like it. I like it. Good. All right, so back to the HSA. So we talked about contribution limits.

Chase Rose:

Yeah.

Josh Robb:

So for most people throughout your working career, that just means along the way if you have extra funds, you can add it to your checking account or sometimes even straight through your paycheck, you can elect to have some money go into your HSA.

Chase Rose:

Which benefit of that is you avoid payroll tax.

Josh Robb:

Yep. Yep.

Chase Rose:

The real question is though is how much should I be contributing to an HSA?

Josh Robb:

Yes. Great question. So again, everybody's situation varies, but in general we say one of the first things we always encourage you to do is if there's a match in your 401k first, get that match. It's free money. We've talked about in a lot of our different episodes when it involves saving is that is the best return you can get on your money because when they match your dollar for a dollar, I mean that's 100% return right there.

Chase Rose:

Absolutely.

Josh Robb:

So before you do any other savings, we always say that 401k is the best place to start saving. Once you get that match, then it comes down to your goals. Right. If you need additional retirement savings, a Roth IRA is a great way to save because if it's tax-free growth in the future, if you have short-term goals like saving for a down payment on a house, a taxable investment account because it gives you the most flexibility. But outside of that, this HSA, because again, it's triple tax savings and the flexibility to one, get tax-free withdrawals for medical expenses or grow it for future needs and have the limitations removed at retirement gives you another big reason to save in here. So this is one of those top accounts that after you get that match, it moves up to the top of the list as one of the great places to start saving.

Chase Rose:

Yeah. And obviously the brokerage account is the exception, but when you're looking at your 401k and you're looking at your Roth IRA, those are most efficiently used when you're retired.

Josh Robb:

Yes.

Chase Rose:

You've reached the age of 59 and a half and you can access those funds penalty free. But for the HSA, not only can you save for the long term and for retirement, but you can also use it in the short term as well.

Josh Robb:

Yep.

Chase Rose:

If you're using the HSA for qualified medical expenses, there are no penalties associated. It doesn't matter what age you are.

Josh Robb:

Correct. Yep. So that's a good thought on the savings, is for a lot of times you're putting money away for a future and you don't plan to touch it for a while. This is one of those accounts where you may touch it sooner.

Chase Rose:

Absolutely.

Josh Robb:

Especially like for myself with four kids, there's a good chance I'm going to need some of that money because kids try their best to hurt themselves or each other all day long. So yeah, that's an account that you can access and use for those short-term goals, especially medical expenses.

Chase Rose:

Yeah. And with that being said, if most retirement accounts, especially if you're a younger adult and you have kids at home, oftentimes those retirement accounts not always, but they are typically aggressive because you have a long-term time horizon. Right. But with this health savings account, if you can use it for short-term medical expenses, that can really bring up the question of how should you be investing your HSA, if at all.

Josh Robb:

Yes.

Chase Rose:

So do you have any thoughts on that?

Josh Robb:

Yeah, so what I, again, everybody's different in how they approach life, but what I suggest for a lot of people is if you think you can use your cash to pay for medical expenses, then investing all or a portion of your HSA makes a lot of sense. If you say most of my ongoing, my doctor visits, all the things I normally do, I can afford out of my budget to take care of that. Then this HSA investing, it makes a lot of sense. For some people, and this is kind of my approach, what I do is I leave a portion in cash usually up to my deductible, or if you want to be very conservative, up to your out pocket to say that's there just in case no matter what the stock market does or however I invest it, it's in cash ready to go. Anything above that is invested for the long term.

Chase Rose:

Yep.

Josh Robb:

So two different ways of doing it. Again, I take kind of the approach of kind of, about my deductible there in cash and then the rest can be invested. But depending on how much cash flow you have, where your budget fits, who or what type of medical expenses you expect, you may have more or less invested there.

Chase Rose:

Sure. Yeah. And obviously as you mentioned, if you have the room in your budget, I would certainly encourage anyone to keep that HSA for long term growth because what we know is one of the largest and even the highest inflating expense buckets in retirement is healthcare.

Josh Robb:

Right.

Chase Rose:

So having that triple tax advantage to count in retirement can be really helpful. And actually I really appreciate the perspective that another advisor here at our firm, Jessica Hinks takes, definitely check her out, the Everyday Advisor blog online, that she has some great content there. How her and her husband do it is they each have their own HSA and their own health plan. They have one of the HSAs, they try their best to maximize both the accounts and they use one for their short-term expenses. So they have two kids at home, they have plenty of health expenses that are associated with that. They use one HSA for those day-to-day expenses, and then the other HSA they're contributing to and they're keeping it for the long term because they know, as I just mentioned, in retirement, they're definitely going to be happy that they have that account in place. So that's definitely a great approach that someone has taken that I really appreciate.

Josh Robb:

Yeah. Yeah. Kind of splitting the difference between the two.

Chase Rose:

Yeah.

Josh Robb:

All right, so now let's talk about a couple of nuances when it comes to contributions. All right. So you have something you wanted to highlight as a possible way of getting money in in certain time periods that may make more sense than just through cash flow.

[12:13] - What Are the HSA Tax Advantages?

Chase Rose:

Yeah. Oftentimes when we have retirees that we work with, and this is something that we've had the conversation with clients, oftentimes people might think, okay, if I'm done working, I'm done with the HSA, right? The balance is what it is and I'll have that for the remainder of my life. But you can continue to contribute to the HSA as long as you are not enrolled in Medicare and as long as you are enrolled in the HSA eligible health insurance plan, as we mentioned earlier. There is also a couple moves that you could take advantage of. The first one being there is something known as the one-time IRA to HSA rollover.

Essentially what that means is its subject to contribution limits. Right. So whatever your contribution limit is for any given year, that's the maximum amount that you can rollover. But the idea is you take dollars from your pre-tax IRA or 401k, and you roll those into your HSA. So you're making a contribution and that is not a taxable event. So you're not generating income on your tax return and you're not getting the deduction as well. It's simply just one IRA to HSA, which is really great because when you think about the pre-tax assets that you have saved up, you can access those, but you're going to pay tax on them.

Josh Robb:

Yep.

Chase Rose:

Right. And so if you make that rollover into your HSA, you can access those funds for medical expenses tax-free. So you're essentially getting the deduction into the IRA. If you roll it to your HSA at some point, then you're getting that tax-free out as well, which is really great. There's a couple caveats to that. So you must, there's what's known as the 12-month look back. So if you're going to do this one-time rollover, you must maintain your HSA eligible plan for 12 months to the day after you process the rollover. And you also can't go onto Medicare either, right? So if you're past age 64 and you're going to be enrolling in Medicare at 65, you probably shouldn't be doing that one-time rollover because you'll be subject to tax at that point.

Josh Robb:

Yeah. What happens is it then becomes a taxable distribution and then you have to pay income tax on that.

Chase Rose:

Yep, exactly. So there's also definitely ways to get dollars into your HSA. As long as you're not on Medicare, and as long as you're in the eligible plan, we oftentimes we'll advise someone if the rollover doesn't necessarily apply to them or if they've already done it, because you can only do it one time in your life.

Josh Robb:

Yep. It's a one-time thing.

Chase Rose:

We'll encourage someone to take a withdrawal from their IRA or their 401k, and that's going to be a taxable withdrawal. So you're going to have tax owed come tax time if you don't withhold taxes. Then turn around and make a contribution into your HSA at that point, right? So it's a similar concept to the rollover, but the only difference is that you're showing the income on your tax return, but you're also getting a dollar for dollar deduction, assuming the limitations apply and all that stuff. So if your annual limit is $5,000, you could take 5,000 out of your IRA, shows up as income, but you get a dollar for dollar deduction on your schedule one when you make that HSA contribution. So essentially no taxes owed.

Josh Robb:

Yep, that's one. And we would encourage you to make sure you talk with a financial and tax professional before doing that, but we've found that that is an option for a handful of people, really between that 59 and a half and 65 when you go to Medicare. If you're on a high deductible plan, consider that, talk with somebody about that if it makes sense in your situation. But that is another way where you say, well, I don't really have the income anymore to make new contributions. Well, this is a way of just moving money from pre-tax into an HSA, and you really get to deduct that income you're creating. So it's really a tax-free movement when you tax return finalizes, so.

Chase Rose:

And that deduction shows up, for those of you a little more nuanced with the income tax return side of things, the deduction shows up on your schedule one, which that's known as a above-the-line deduction. So your adjusted gross income on your tax return boils down to your state tax return and then from there to your local tax return as well. Right. So you're getting that deduction before your AGIs calculated, so you're actually not paying tax on that withdrawal at the state or local level as well, which is definitely helpful.

Josh Robb:

Yep. So that is definitely something to consider. Always talk with your professionals before making those decisions. But just a way for some people who, again, they think, well, I'm done with work. There's no more ways of getting money in. There are some options, but there's a lot of caveats there to just make sure you understand it before you make those moves. Chase, I appreciate it. I know how much you love HSAs, and so I'm glad you came here to talk about it. But in general, we are excited about them because of the tax advantages you can get, and again, it's all about habits. Getting in the habit of saving for a future expense, and I guarantee you everybody listening is going to have a medical expense in their future.

Chase Rose:

Absolutely.

Josh Robb:

So it is a way of creating those habits to save for the future, which I really like.

Chase Rose:

And the one last thing I even wanted to bring up is we mentioned if you can afford to pay those healthcare expenses out of pocket now, keep your receipts.

Josh Robb:

Yes.

Chase Rose:

Keep your healthcare expense receipts. I personally, I'm 25 years old, right? If I keep healthcare expenses that I'm incurring today, I can pay them out pocket and keep my HSA invested for the long term. When I retire, I can reimburse myself, take withdrawals from my HSA that cover the healthcare,-

Josh Robb:

Yeah. There is no time limit.

Chase Rose:

There is no time limit on withdrawing from your HSA for eligible qualified expenses.

Josh Robb:

Yes.

Chase Rose:

We had a client recently who came in and she had been saving receipts for years.

Josh Robb:

Yep.

Chase Rose:

And she reimbursed herself for those expenses even though she hadn't incurred them in years.

Josh Robb:

In that year. Yeah.

Chase Rose:

She was able to take the tax-free withdrawal from her HSA to cover it. And the only time you have to keep the receipts because if you get audited by the IRS,-

Josh Robb:

That's when you have to prove it.

Chase Rose:

You have to prove that they were tax-free withdrawals. But outside of that, yeah, it's definitely a great tip there.

Josh Robb:

All right, well thank you very much. Overall, like we said, first, get that match in the 401k, but then after that the HSA is right up there with some of those other great savings vehicles because of its advantages down the road. So thank you Chase. For everybody out there, please share this episode with anybody you know that was talking about HSA or thinking through the best ways to manage that. And then if you have any questions, email us at hello@theinvesteddads.com. And as always, we look forward to talking to you next time. Bye.

Thank you for listening to The Invested Dads Podcast. This episode has ended, but your journey towards a better financial future doesn't have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today's show. If you enjoyed this episode and we had a positive impact on your life, leave us a review, click subscribe and don't miss the next episode. Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management. All opinions expressed by Josh, Austin or any podcast guests are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management.

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