Speaker 2 (00:02.274)
Welcome to the Physician Family Financial Advisors Podcast, where physician moms and dads turn today's worries about taxes, investing, and extra money into a comfortable feeling of financial security. I am Ben Utley.
And I'm Nate Ranicki. Today's episode is about the single best tax deduction for physicians. And that might be the HSA. Ben, that is a tall order. The best tax deduction.
The single best tax deduction ever. Yeah, so Nate, you're our on staff health savings account expert. So I'm going to ask you some questions today. So first off, what is a health savings account?
Right.
Speaker 1 (00:47.734)
Yeah, let's start there. So a health savings account. Well, let's start with kind of some backstory on it. It was established in 2003. George W. Bush signed the Medicare Prescription Drug Improvement and Modernization Act of 2003. That's a yeah. So basically, though, what they are is a it's a tax free financial account. So a vehicle where you can save on taxes when you put the money in.
Thank you.
Speaker 1 (01:15.566)
for individuals to save for future health expenses. So you put your money in, you don't pay taxes on that money to encourage you to pay for some healthcare bills.
Okay, fantastic. So I get it, it's like this financial account tax thing, it's something about my health, thanks George. So how does it work?
Yeah, so I'll start with kind of what qualifies you to get one. Then we can talk about the benefits, but mainly what you have to know is in order to get an HSA, like how does it work? How do I get the money in is one way to answer how does it do I qualify? Yes, and that would be to have a high deductible health plan. And that is a bit tricky to understand most of the time.
your employer will tell you you have a high deductible health plan because it is a way of them giving you some insurance and then providing you a benefit just to allow you to use an HSA. But if sometimes, and I've actually experienced this myself, they won't tell you that you have a high deductible health plan. And so you can kind of check into it. So what a high deductible health plan is, is essentially for a family, if you have a deductible of
$2,800 or more. This year? This year in 2022. That's right. That's a good point because these change. And your out of pocket maximum for a family is $14,100 per year. is a high deductible health plan. And that means you can have an HSA. Even if your work doesn't offer you an HSA, you can go out and open one on your own.
Speaker 2 (03:02.008)
Hashtag eligible.
Yes, eligible. So that's how you qualify for one. And then what it is, is I mean, it's just a, it's an account much like any other account you would open. If you have, if you qualify, you can go open one up, you can make contributions. And when you make contributions, you don't have to pay taxes on the money you contribute.
Nice. So, like, I get it. So I put some money in this thing. I get a tax break, right? That's actual tax deduction. Okay.
That's right. And for physicians that tax break, lot of times that comes with a lot of tax breaks come with caveats or they're not as beneficial as you might think they are. This is flat out. You can put money in there and take it directly off the top line of your.
Pure tax break. No ifs, ands, or buts. Pure tax break. Now what happens once the money goes in there? you know, usually if I take money out of something, there's a catch, right?
Speaker 1 (03:52.91)
That's right.
Speaker 1 (03:59.638)
Yeah, so you have to use the money that you put in there for health related expenses. So if you take the money out, you must have, you know, essentially a reason to take it out. And there's a long list of of qualified expenses that you can use this money for. Give me one might be simply go into the doctor. I mean, you to pay a copay or something or you.
Give me one.
Speaker 2 (04:25.71)
Any weird ones? Can I pay for a hot tub with it?
No hot tub, but there are some weird ones. I've actually seen people just spend money on, you know, first aid kit. I mean, there's a lot of, yes, you can do lots of things with your HSA. And my family in our younger years, we really needed to this money, we spent some of our HSA on my wife's pregnancy. So there's a lot of things that you can use this for, but the best thing
that you can do is usually leave the money in there. And there's some strategy to making this HSA more beneficial than just getting the tax break. So I think we're going to get to that in a moment.
Thanks.
Speaker 2 (05:17.198)
What is a tax break? What's the value of this thing for me?
Of the
How much do I get?
For a physician, the tax break is huge. So you can put in a maximum of $7,300 for a family. Okay, so $7,300. To put that in perspective, the amount that you can put into an IRA is, I think it's around $6,000.
Only six, yeah. With IRA, there's a catch-up for those over 50s. There's a catch-up on the HSA.
Speaker 1 (05:51.918)
No catch up for the HSA.
I'll come on Nate, I'm going to be 55 soon. know it's a grand. It's a grand. I'm going to give you a pass on that one because you're a youngster, but yeah, I'm pushing 55. So yeah, you get to put another thousand bucks in there if you have gray hair.
there it is. Okay.
Speaker 1 (06:11.374)
Jeez. Well, it's even better. Okay, so I didn't know about that. So the $7,300 that you can put in or $8,300 if you have gray hair is the best thing about the tax break that I was kind of touching up on some of this. I found out that it's actually even better than contributions to an IRA because you don't pay FICA tax on it either. So it is flat out like.
ooh, nice
right off the top line. And for a physician, if you're paying 40 % in taxes, right? That is the day you put the money in, you save almost $3,000, like right into your pocket.
And that's permanent tax savings, right? That's like no gimmicks, no tricks, no IRA, give it back to me later kind of thing.
Yeah, sometimes when we when we talk about IRAs with with physicians, it's kind of like, OK, there's this traditional IRA and you get the tax break up front. If you even qualify, most physicians don't qualify for that tax break. Or there's the Roth IRA, which you pay taxes up front and then it grows and grows and then you don't pay taxes later. It's complicated. This is put the money in no taxes. Take the money out, no tax.
Speaker 2 (07:21.038)
Get a tag. All right. Now I'm still fishing around for like a hitch up in my get along here. I'm still looking for the catch 22. So I noticed earlier on you said high deductible health plan, and then you said something about 14,000 out of pocket dollars. And I thought, you know, unless I'm a neurosurgeon working in, you know, New York city, uh, 14,000 bucks is still a lot of green for me. So, uh, I mean, that sounds like
In fact, that sounds like more than the $3,000 I'd save in taxes. So, is that the hitch?
You know, that is the hitch. That's the one kind of pitfall to all of this is if you, let's say you had a really bad situation one year where you had to kind of approach that out of pocket maximum, it's hard to justify, you know, not using this money or just not using a better health plan because a lot of physicians, they have, I mean, they work at hospitals. The hospital gives them pretty good insurance. And so,
you know, a lot of times it just doesn't make sense for them to in their mind to to take this risk when they just to get a tax break. But there's something important about this tax break that I think people don't quite understand. Well, first of all, it's not just fourteen thousand versus zero. Right. So there's a out of pocket maximum here. But your other health plan would have an out of pocket maximum as well. True that. So it might be lower, but it's not going to be zero. Right. OK.
So that's one thing. The next thing is the reason that these are so valuable is not just the tax break. It's what you do with the money once it's inside the account. And that is you can invest the money.
Speaker 2 (09:09.454)
Oh, you can invest it because most of these are set up as like savings accounts and usually the employer hooks you up with a savings account that's issued by the insurance company that you hook up with. But you're telling me that, you know, if I start off with Optum Insurance and my company opens me up an Optum Health Savings account, there's nothing to keep me from like moving that money to Fidelity even while I'm still working, right?
That's right. And many of the health savings accounts that are now being offered now that the health savings accounts, the like Optum, the servicers are getting smart and they're realizing what how people are using these accounts. So the average person does not invest their HSA. Right. This is this is not something that is obvious to them and that how valuable it could be. But if you do invest your HSA, like every
physician client we serve when when we recommend they put money in their HSA right behind that recommendation is and invest it according to your retirement plan Yeah, you're planning on using this money in retirement
So basically what I hear you saying is invest it, don't spend it, is that right?
That's right. And I want to go through, I've actually, it's a really easy way to think about whether or not it's worth it. Okay. So imagine you had the worst health expense, you know, year of your life and you went and you hit this $14,000 maximum. Okay. And you had to pay that out of pocket because your financial planner told you not to spend your HSA. Right. Well, you can, even in that situation, there's an argument to be made that
Speaker 1 (10:44.718)
it would still be more beneficial to have this high deductible health plan because if you're, let's say a young family and you invest your $7,300, let's say you're 35 and you got 30 years left till retirement. I won't get into the math, but basically with the rule of 72, if you got just a 7 % return from now until retirement, that's 30, let's call it 30 years. Still with me, Ben?
Yeah, I'm with you and my rule of 72 hat is running. think I'm going to get, I'm going to have four doubling periods by the time I get retirement. Is that right?
Maybe three but Okay, three so three doubling period so that's seventy three hundred dollars just in this one year gets a double three times
Okay, we'll say three conserved.
Speaker 2 (11:33.538)
times two to the third power right so that's seventy three hundred times eight yep I'd wind up with that retirement so eight seven that's about fifty six let's say sixty thousand bucks right and I could cover some out-of-pocket with that right
$60,000 bucks, that's right.
Speaker 1 (11:49.23)
That's right. And so you can You can basically say this is for retirement and yes right now We're gonna have to pay out of pocket, but it's for this enormous Growth and with this enormous growth in mind that is tax-free So that's in the worst-case scenario Right and in many times not not all the time but many times you don't have that worst-case scenario you have a regular year where you get your checkups and
That's about it. And you pay a few hundred dollars in doctor bills and you get that $60,000 in retirement anyways.
So what I hear you saying here is that if I got a choice about where to put some money, like let's say I could put money in my 401k and get a match. If I could put that money in a backdoor Roth, if I could put it in a taxable account, health savings account is way, way up on that list. Is that right?
That is right. I would say the only the only thing that could compete would be The 401k match maybe the free money and then they know the free money But even then you're you're gonna pay taxes when you pull it out. Yeah, so and I wouldn't necessarily Say I I don't know if I would play the ranking game with this Yeah, mainly because you should be doing all of those things though. That's table stakes
And most people's hang up with the HSA is this fear that they're doing something kind of, I'll use the word crazy with their health savings account or with their health insurance. And that's just not the case. I think one of the biggest pushbacks I get on the HSA is for physicians saying, I don't go to the doctor as much if I have a high deductible health plan.
Speaker 1 (13:42.196)
Mm-hmm, and I understand that I understand that in theory you don't want to pay the bill and I truly believe that the reason that that that physicians end up doing this is out of a misunderstanding of how everything works how the HSA works how their health insurance works and once you gain an understanding of how something works you can get good at using it and It's a it's a mindset shift
that I believe will be really powerful for retirement and still allow you to go get your checkups and go to the doctor like normal. Be happy to spend the money.
I've had one now since Barack Obama updated the healthcare system and made it so that I could get into an HSA. And so think that's been, about eight years, maybe 10 years I've been contributing to this thing and kind of living with it. And I'll tell you that when I started paying my bills out of pocket, you know, like I started actually seeing those healthcare bills, my response to that was to take a lot better care of my health, you know, to begin.
walking and drinking more water and getting more regular checkups and that kind of stuff. So there's another way to respond to this besides just having fear.
That's right. Yeah. And, and I encourage that, you know, sometimes it, it worries me when we have families who are like not going to the doctor because of that. And your option is to kind of stay in that mindset and basically give up this opportunity, which is a reasonable option if you truly can't shift your mind about this. But the other option is to do what you've done. And actually that's similar to what I've done. You know, if, if I'm going to go,
Speaker 1 (15:18.528)
not go to the doctor all the time maybe I'd get better care of myself but even better than
Worse than that Nate is when you don't go to the doctor, you're kind of teaching your kids how to not go to the doctor. Yeah, I mean they need to know how to use the healthcare system so that when they do show up in our listeners office, they're all freaked out like the first time they went to the dentist or something. I they need to have a good experience. They need to watch you model that behavior of going to physician. So I know that's not Health Savings Account 101, but it's parenting and we're both parents.
Right. And last note on that is I've had an HSA for years. I've always selected it. Even when I had other jobs that had different plans, I always selected the HSA plan. And every time I go in, I'm surprised with with the typical checkups with how little I end up having to pay. And that came out of from Obama as well, where a lot of things are just covered now. Yeah. You know, and maybe you pay a little bit, but not a whole lot.
Awesome. So we ready to wrap it up?
I think so. There's one more little thing, one last hang up just to convince the last person holding out on the HSA, which is let's say miraculously, which we've never seen this, but miraculously you are the person who has perfect health and you don't use your HSA for health related expenses. There's a rule in the tax code that allows you to essentially use this like a traditional IRA at 65.
Speaker 1 (16:49.454)
So there's a backstop here that you can certainly use, which means all more reason to use it. then, sorry, one more thing. An HSA is not an FSA.
Yeah, not a flexible spending account. People get nailed by that all the time. They think it means use it or lose it like the FSA. F folks, F is for fail. So if you fail to spend your flexible spending account, you get an F. But if you put it in a HSA, H is for happy and it means you can be happily holding your money forever. Nice mnemonic today.
There you go. Alright, I'm ready to up now.
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Speaker 1 (18:02.03)
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