featured image for podcast episodeBack To Basics: Getting Started With FI

Back To Basics: Getting Started With FI
Episode 257

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Posted by Choose FI

Episode Guide

Episode Summary:

The episode explores practical strategies for navigating Health Savings Accounts (HSAs) effectively, providing insights into eligibility, tax benefits, and strategic withdrawals. MK shares her personal journey of managing HSAs with her spouse and the complexities involved in making withdrawals when medical expenses arise. The discussion also delves into the importance of maintaining receipts and documentation, ensuring that listeners understand how to leverage their HSAs for future medical needs. Additionally, the hosts emphasize the significance of aligning financial goals with personal values to achieve financial independence. The content builds on foundational concepts and offers actionable advice for listeners eager to start their journey toward financial freedom.

Episode Timestamps

ChooseFI Podcast Episode Show Notes

Episode Summary

The episode delves into effective strategies for navigating Health Savings Accounts (HSAs), covering eligibility, tax advantages, and how to manage withdrawals. MK shares her personal experiences with HSAs while preparing for a new family member, highlighting the complexities of making withdrawals. The hosts stress the importance of organizing medical receipts and aligning financial goals with personal values, paving the way toward financial independence.

Key Topics Discussed

  • Introduction to HSAs

    • Overview of Health Savings Accounts and their benefits.

  • MK's HSA Experience

    • MK shares her journey of managing HSAs with her spouse.

  • Navigating HSA Withdrawals

    • Tips and considerations for withdrawing funds from HSAs.
    • "Manage your HSA effectively to navigate complexities."

  • Understanding HSA Eligibility

    • Breakdown of who qualifies for an HSA.
    • "Ensure your HSA plan qualifies for your needs."

  • Best Practices for HSAs

    • Strategies for maximizing benefits, including investment options.
    • "Utilize your HSA to maximize compounding growth."

  • Discussion on Financial Independence

    • The significance of aligning financial strategies with personal values.

Actionable Takeaways

  • Keep a detailed record of your medical expenses for HSA reimbursements.
  • Consult your HR for eligibility regarding HSA plans.
  • Invest your HSA contributions into low-fee options for compounding growth.

Key Insights

  • Planning and Organization: It’s essential to keep accurate records of medical expenses and receipts for smooth HSA management.
  • Tax Benefits: HSAs offer significant tax advantages, making them a valuable tool for medical expenses and long-term savings.
  • Investment Growth: By using an HSA as an investment vehicle, individuals can enjoy compounding growth on their contributions.

Quotes

  • "For most people, cashflow is not the overriding concern."
  • "You want to maintain these records yourself."

Discussion Questions

  • How do you currently track your medical expenses?
  • What strategies can maximize your HSA contributions?

Speaker Highlights

  • Jonathan Mendonsa: Co-host and advocate for financial independence through thoughtful planning.
  • Brad Barrett: Co-host with practical insights on managing HSAs and financial strategies.
  • MK: Shares personal insights on navigating HSAs effectively while planning a family.

Timestamps for Relevant Sections

  • Navigating HSA Withdrawals
  • Understanding HSA Eligibility
  • Best Practices for HSAs
  • Discussion on Financial Independence
  • For further insights and to join our community, visit ChooseFI.

Conclusion

As discussed in this episode, managing your HSA effectively not only helps navigate the complexities associated with healthcare spending but also aligns with broader financial independence goals.

Mastering Health Savings Accounts for Financial Independence

Navigating the complexities of Health Savings Accounts (HSAs) can be essential for achieving financial independence. HSAs offer remarkable tax benefits and allow individuals to save for medical expenses while growing their savings. In this article, we will provide actionable strategies to effectively manage HSAs, ensuring that you maximize the benefits they offer.

Understanding Health Savings Accounts (HSAs)

An HSA is a Health Savings Account, a tax-advantaged account designed to help you save money for medical expenses. Contributions to an HSA are pre-tax, meaning you can deduct them from your taxable income. This makes HSAs incredibly powerful tools for those who qualify, allowing for both current and future healthcare needs.

Eligibility for HSAs

To be eligible for an HSA, you must participate in a qualified high deductible health plan. In 2020, this typically meant having a deductible of at least $1,400 for individuals or $2,800 for families. Check with your HR department or insurance provider to ensure your plan qualifies for HSA contributions.

Key Benefits of HSAs

  1. Tax Advantages:

    • Contributions reduce your taxable income.
    • Withdrawals for qualified medical expenses are tax-free.
    • Earnings on the account grow tax-deferred.

  2. Long-Term Savings: Many people overlook that HSAs can serve as a long-term investment vehicle. Let your contributions grow over time, and consider delaying reimbursement for medical expenses to maximize compounding growth.

Best Practices for Managing Your HSA

Keep Detailed Records

Maintaining accurate and detailed records of your medical expenses is crucial. Create a system to track all your healthcare-related spending, including receipts and relevant documentation. Utilize cloud storage options like Google Drive to avoid losing essential information.

  • Action Item: Start a digital folder to keep all receipts organized by year. This will help you easily pull them when you're ready to make withdrawals.

Utilize HSA Contributions Wisely

Maximizing your HSA contributions is vital to reaping the full benefits. In 2020, the maximum contribution limit was $7,100 for families and $3,550 for individuals. Consider front-loading your contributions to benefit from tax advantages and grow your savings faster.

  • Recommendation: Invest HSA contributions into low-fee options that align with your financial goals, such as broad-based index funds.

Reimbursing Yourself

Understand that you do not need to withdraw funds immediately after incurring medical expenses. If you pay for medical costs out of pocket, you can reimburse yourself later, even years down the line. Keeping a record of these expenses allows for strategic withdrawals at a time that May reflect better cash flow on your part.

  • Master A Tip: Consider paying for smaller medical expenses out of pocket. This approach allows you to grow your HSA savings, providing a larger buffer for future healthcare needs when you might require it more.

Effective Strategies for HSA Withdrawals

Understanding how and when to withdraw from your HSA is crucial for maintaining its benefits. Here are some tips:

Plan Ahead

When you anticipate medical expenses (like a planned surgery or a baby), prepare your HSA accounts accordingly. Doing a “dry run” of the withdrawal process, as discussed by MK during her experience, can help clarify any complexities ahead of an actual need.

Review Your HSA Provider Options

Not all HSAs are created equal. Some providers may offer better investment choices and lower fees than others. Fidelity and Lively are two popular choices among the Fire community due to their low fees and flexibility to invest.

  • Pro Tip: Regularly review your HSA provider and ensure it meets your financial needs. If you find a better option, consider switching.

Aligning Financial Goals with Personal Values

To achieve financial independence, it’s essential to align your HSAs and other financial strategies with what truly matters to you. Determine your personal financial goals and make sure that your actions—such as funding your HSA—are in line with these values.

Conclusion

Mastering Health Savings Accounts offers a powerful strategy for reaching financial independence. By understanding HSAs, managing records diligently, maximizing contributions, and aligning with your values, you position yourself for long-term financial success.

As you embark on or continue your journey toward financial independence, remember that your HSAs are not just a short-term savings tool. When managed wisely, they can become a cornerstone of your comprehensive financial strategy, ultimately enhancing your life quality while providing security for future healthcare expenses.

By staying informed and proactive, you can take control of your financial health and chart your path toward a financially independent future.

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What You'll Get Out Of Today's Show

  • In this ChooseFI Back to Basics episode, we review Health Savings Accounts (HSA). What happens when you need to finally pull money out after funding it year after year?
  • ChooseFI Chief Content Officer, MK, is just weeks away from having her baby. For years, she and her husband, Jason, have been funding separate HSA accounts without making any withdrawals.
  • They now contribute to a family plan HSA and decided it was a good time to test out how complicated the process was to withdraw HSA funds.
  • They discovered some plans are easier than others. The process of withdrawing funds from the fund MK had rolled over to Fidelity was super easy. Jason's was a bit more tricky due to the Health Insurance Portability Accountability Act (HIPPA) compliance laws and auto-reinvest settings. Now that they tested it out, they feel confident they will know what to do in the future.
  • An HSA is a type of investment vehicle that gives you a tax deduction in the current year and helps pay for healthcare-related expenses.
  • Only those participating in qualified in high-deductible healthcare plans are eligible for HSAs. For 2020, the IRS defines a high-deductible plan as one with a deductible of $1,400 for an individual, or $2,800 for a family. the maximum a family may contribute in 2020 is $7,100, and half of that for an individual.
  • The money going into the account isn't subject to income tax and sits in the HSA account until you submit for reimbursement of healthcare expenses. HSA withdrawals for healthcare expenses are also tax-free.The benefit of an HSA is that the money can build and grow over time. Healthcare expenses do not need to be submitted for reimbursement as they are incurred. HSA participants can pay out-of-pocket and wait for years before requesting reimbursement if they choose to.
  • The IRS criteria dos state that the high-deductible plan must be a qualified plan. Check with your company's human resources department to determine if your plan is a qualified one.
  • HSA participants should also understand who their plan is with, what investment options they have, and what the fees are. Based on fees, Fidelity and Lively are two good providers who offer low-cost, board-based investment fund options.
  • The goal is to cash flow medical expenses in your younger years when they are generally lower, funding the HSA with pre-tax dollars and allow them to grow until later in life when healthcare costs begin to increase.
  • There may be additional tax benefits from using your employer's HSA provider rather than Fidelity or Lively.
  • Because you can submit for reimbursement years after the expense was incurred, save your receipts. Brad has a Google doc that lists all of the healthcare expenses he pays out-of-pocket and saves a pdf of the receipt in his Google Drive account.
  • Even if your provider offers a way to upload receipts, you should always maintain your own records and only use the provider's system as a secondary backup. If you change HSA, you could lose your receipts.
  • It is your responsibility to verify to the IRS that you've been using the funds in the HSA appropriately. It makes it easier if you have all of that information maintained in your own cloud-based account.
  • After several years or decades of cash-flowing healthcare, it may be possible to have tens of thousands of dollars of reimbursable expenses that are accessible anytime, tax, and penalty-free whenever it is needed.
  • The final episode in round one of the Households of FI series airs next week. Throughout this series, ChooseFI follows eight diverse households at different points on their path to FI.
  • More exciting news for ChooseFi is the website redesign, expected to launch in the coming weeks. The new website format was designed with your experience and journey to financial independence in mind. The content on the site has been curated so that people looking for specific content can easily find what they are looking for.
  • If you would like to receive a notification when the new website has been launched, go to ChooseFI.com/subscribe and an email will be sent to you when it's ready.
  • Brad recently gave a presentation to Dominick Quartuccio's Do Inner Work mastermind group on the Why of FI. Though people seemed to understand the why of FI, there were questions regarding how to get to FI.
  • How does someone go about getting started? It starts with visualizing where you want to be in 10-15 years, what your goals, and what kind of options you'd like to have.
  • If Brad were to go back to when he began his journey, he would have said that there's got to be more to life than what he's experiencing. Life was comfortable, but it felt like Groundhog Day. He could see himself doing it for the rest of his life.
  • The second task when starting on the path to FI is to take an assessment of what your life actually costs. What you earn minus what you spend, equals the gap, or the amount of money you have left to work with.
  • Adding up your structural expenses, recurring monthly bills, unplanned expenses, and then looking at all the little discretionary expenses can be a difficult task. No one should beat themselves up over it.
  • Once added all together, you have a realistic estimate of what your life actually costs. It's not complicated math.
  • ChooseFI Episode 258 airing on Monday will tackle the other side of the equation, the gap, and discover how to affect the outcome.
  • It's the first anniversary of the release of ChooseFI's book! To celebrate, we're giving away the first chapter for free when you go to ChooseFI.com/book.
  • The weekly book giveaways are back! Winners will be selected from response to Brad's newsletter call for FI wins. This week's winner is Belinda. After tracking her spending for three months, she made a budget and reduced her family's food budget by $900 a month. She's also funding her Vanguard account $500 a month, refinanced her car loan, her husband maxed out his 401K, and she hopes to max out her SEP IRA. She says having control of their money is giving them power back over their lives.
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Resources Mentioned In Today's Conversation

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