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Dentists, Puns, and Money is a podcast focused on two things: The financial topics relevant to dentists leaving clinical practice and the stories and lessons of dentists who have already done so.
1. The stories of dentists who have transitioned from full-time clinical dentistry.
2. The financial topics that are relevant for dentists making that transition.
If you’re a dentist thinking about your exit from clinical, and you’d like to learn from the experiences of other dentists who have made that transition, be sure to subscribe to your favorite podcast app.
Host Shawn Terrell also dives deep into the many financial components of exiting dentistry, including tax reduction strategies and how to live off your assets.
And, we try to keep it light by mixing in a bad joke… or two.
Please note: Dentists, Puns, and Money was previously known as The Practice Growth Podcast until March 2022.
Welcome to dentists, Puns, and Money. I am your host Shawn Terrell and the topic de jour in this episode is health savings accounts often abbreviated and referred to as an HSA. HSA is our individual accounts that can be used to pay for medical expenses for those covered by a high deductible health insurance plan, and they represent a good financial planning and tax reduction planning opportunity, if understood correctly, and leveraged correctly. So in this episode, we'll dive into the 13 things you might not know about health savings accounts. Now that sounds like a long list. It kind of is but the items on it some of them are less complicated than others. So we'll hit those quickly at a high level just to cover all of our bases. If you make it to the end of the episode, you'll be able to evaluate how well you are leveraging your HSA and where you might have some opportunities to improve your financial planning moving forward. As a reminder, our companies and just exit planning helps dentists lead in clinical with the financial peace of that transition with things like HSAs with ways to reduce that massive lifetime tax bill and with ways to optimize living off your assets. If you are interested in guidance on your taxes and your income as you exit clinical schedule and initial consultation with us on our website, which is dentist exit.com And with that introduction, let's dive into the 13 things you might not know about health savings accounts. Just a quick reminder before we get started, our tax planning philosophy is to work with clients to help them pay the least amount of tax total their lifetime, even if that means they might pay more tax than they have to in any given year. There is no magic bullet to do this contrary to what you might see on the internet. There's no magic way to sell a bunch of money at a peel box in the Cayman Islands and just make your tax bill disappear instead. It's about a series of small intentional actions year after year that all add up to a big amount of savings after two or three decades. I believe that everything in life compounds over time, good and bad. And the same is true with proactive tax planning strategies. proactive about tax planning, how you make a dent in your total tax bill over the long haul. And if it were easy, everyone would do it. Like most things with the IRS HSAs can be a little complicated. To quote Jeffery Lebowski one of my favorite movie characters in slot outs a lot of what have yous, right so let's get into the 13 things you might not know about HSAs beginning with the low hanging fruit, but most people commonly do know about HSAs that would be number one would be that HSAs are often referred to as triple tax savings account. That means any money that you contribute to an HSA reduces your taxable income for that year or any money that your employer contributes on your behalf is not treated as taxable income to you. The second advantage any growth on that money in an HSA account is tax deferred meaning there was no tax due on that growth. And the third tax advantage in the triple tax is that if you use the money for eligible medical expenses, there is no tax do ever so the contribution reduces taxes grows tax free and there's nothing new and taxes later if you do it right. Again, triple tax advantage number two a lesser known tax advantage with HSAs is that if you contribute to your HSA account with a deduction from your W two paycheck, you can also eliminate the payroll taxes associated with that contribution. So quick refresher, we not only have to pay taxes on our overall income, we have to pay Social Security and Medicare taxes otherwise known as payroll taxes, and those are roughly 7.5% for employees double that for those being taxed as being self employed. If your HSA Contribution comes out your paycheck though you can eliminate that payroll tax and virtually as an example contribute to your HSA directly from your checking account with after tax dollars will reduce your overall taxable income for the year would not reduce or eliminate any payroll tax reminder if you wanna reduce your 2022 income by maxing out your HSA contribution for the year or 2022. The deadline to do that is April 18 of 2023. So just a few days away from the release date of this podcast, everything that you might not know about your HSA it is one of the few reduction strategies tax reduction strategies where there are no strings attached to how much income you earn. An example if you make over a certain amount of money and you are covered by a 401k or other qualified plan, you cannot make a deductible IRA contribution or if you make over a certain amount of income you will pay a higher capital gains tax rate long term cap gains than someone who earns a lower amount of income with the HSA. Doesn't matter how much you earn. Everyone can use the same annual contribution limit to reduce their taxes for that year. Number four things you might not know about your HSA there are no required minimum distributions associated with HSA accounts. Other tax deferred accounts like 401, Ks and IRAs you must start withdrawing a portion of the money from that account once you hit a certain age. We have talked about all the changes with required minimum distributions, otherwise called RMDs. Recently, and there have been some changes from the secure act 2.0. And we've covered those in recent podcasts. So if you're interested in more detail there, go back and listen to those episodes from earlier in 2023. But just know there's no RMDs with HSAs worth noting though there can be some adverse consequences related to taxes. When an HSA account holder passes away. We will touch on that a little bit later. Number five, the funds in your HSA can be invested. The idea is to make the contributions you make grow over time, although nothing is guaranteed. We touched on this all the time but just to drive it home. The growth of the money in your HSA is tax deferred so no tax is due there as long as you access the account properly and appropriately. Worth noting that more than likely, you'll have to hit some account balance minimum before you should or are even allowed to begin investing the money in that account. In other words, many HSAs require a minimum amount of cash be kept in the account to actually pay for medical expenses that pop up on the exact account minimum varies but as a good rule of thumb I think it's prudent always make sure you have your maximum annual out of pocket medical expenses covered for the year keep those available in cash and anything above that amount is fair game to be invested for the midterm or for the long term time horizon. Number six, you might not know about HSAs you can only contribute money to an HSA account while you're actively covered by a high deductible health care plan. So if you're on a PPO or Medicare, you can no longer contribute to an HSA. The good news here is if you do contribute to an HSA while you're eligible and later become eligible, which covers just about everyone that lives to Medicare age, the funds in your HSA don't expire as long as you have not yet expired. So a smart common strategy would be to max out your contributions to your HSA while you're covered by one and your working years while you're in probably higher tax bracket. And then after you exit clinical and then you're on Medicare, you've got a big tax free bucket of money to pay for medical expenses in retirement, which is when the cost of medical care tends to increase significantly for most people. Number seven, a health savings account is always an individual account. There are no joint HSA accounts there are no family HSA accounts, and that can be confusing. We'll deeper here in just a minute but just know that each adult that is covered by a high deductible health plan that wants to contribute to an HSA should have their own account. minor children do not need to have their own account. I think it's okay for the parents to use their account to pay for their kids medical expenses, or at least that's what I've been doing for years and I haven't gotten any blowback yet. I'm number eight is what I think is the most confusing element about HSAs. And truth be told, I didn't understand this until very recently and I've been a financial advisor who has been covered by an HSA since at least 2011. So listen up your eligibility to contribute to an HSA and the amount that you can contribute to an HSA two different things determined separately. So the first part of that is pretty straightforward. Are you covered by a high deductible health insurance plan? If no, then there is no HSA Contribution allowance if yes, your annual contribution limit to the HSA depends on whether you are covered by an individual health plan or a family health insurance plan. And if you are covered by a family plan, your individual annual contribution limit depends on how much your spouse contributes to his or her HSA, if at all. So if you're covered by an individual plan, your annual contribution limit for your HSA in 2023 is $3,850. You are covered by a family plan your annual contribution limit for the entire family is $7,750. That means one spouse can contribute all non or part of that total amount if there is a married filing jointly couple covered by a high deductible health plan that $7,750 is the maximum amount for the year for both people combined. Where it gets confusing is when one member of a married filing jointly couple is covered by a high deductible health plan but the other spouse is not covered by that plan. An example would be one spouse is already on Medicare. The other was not but they still need a family health plan because of dependent children in that my interpretation is that while there's only one adult covered under the plan, that one at all in that scenario can still make an HSA Contribution up to the annual family contribution limit. As I said a minute ago is $7,750 for 2023. So roughly double the individual contribution for that year. So you start doing the math on things like this. What's the annual tax savings on getting something like your maximum HSA Contribution right for one year? What's the tax savings over several decades, and you can start to see how some of these seemingly small drops in the proverbial bucket add up and compound over time. And this is just a great example of how proactive tax planning over the long haul can make a dent in someone's lifetime tax bill is a great example of how you can legally pay the least amount of taxes over your lifetime item number nine you can make catch up contributions to your HSA if you are older than 55 years old, in addition to the annual individual or family maximum. So if there's two adults that are HSA eligible, and they're covered under a family health care plan, and they're both over the age of 55. That is nearly $10,000 per year in total that can be contributed and deducted from someone's taxes for that year. And again, no income limitations with this item number 10 might be especially important for dentists in the year that they exit clinical or switch to Medicare. If you are covered, or if you are not covered, excuse me by a high deductible health insurance plan for the entire year then the amount that you can contribute to your HSA will be prorated in some way. Not going to get to all the weeds here but just make a note to dive deeper on this if your health insurance coverage changes in the middle of a given year. Number 11. On the list of things you might not know about health savings accounts is a another long term strategy not have to use your health savings account to actually pay for your medical expenses. When you incur those expenses. You can actually reimburse yourself for eligible expenses later, like way later. The strategy here would be to maximize your HSA each year for as long as you can not touch it and then pay for any actual medical expenses incurred out of your own pocket with the idea to let the HSA grow untouched for as long as you can then reimburse yourself for any medical expenses paid for out of pocket all the way back to the time that the HSA was established even if that was decades ago. The key here is to keep really good documentation of all your expenses in case you're ever asked to prove them. And you can not reimburse yourself later for expenses that were also itemized on your tax return. But to know that and then also good to know the one downside to be aware of we'll go deeper on this in a second. But if the HSA account holder dies with a large amount of unreimbursed medical expenses from years ago, could be somewhat difficult to sort all of that out after the death of the account holder number 12. As alluded to a second ago, the tax benefits of an HSA get tricky upon death of the account holder if the beneficiary of the account is not their spouse. If the beneficiary of the account is their spouse, then those proceeds pass to the beneficiary as if it were their own HSA and they can then use that account to pay for their own medical expenses. However, if the beneficiary is not a spouse and it's a child or some other person then the proceeds from the HSA will be treated as taxable income to that person. One caveat the beneficiary does have up to a year to pay off any remaining medical expenses of the deceased account holder which would then reduce the account value unless the tax liability their beneficiary of the HSA is an estate or trust. This caveat does not apply. So bottom line just make sure a little bit more of it here at the end but if your HSA balance is of any consequence, make sure your beneficiaries are aware of some of these pieces so deeper planning can occur. And that brings us to number 13 lucky number 13 The
final item on the list of things you might not know about HSAs everything we have discussed thus far in the episode has been relative to your federal taxes and your federal tax return. Depending on where you live. Your state might have other rules to navigate as it relates to tax planning and your HSA. So just be sure to coordinate with your accountant who can advise you on any state specific laws that need to be navigated. Right one final reminder not on the list. As with all tax planning, there is no magic database somewhere that coordinates your HSA contributions for the year and make sure they all get reported correctly on your tax return. So just make sure you have IRS Form eight nine counts for this and work with your financial advisor and your account to make sure that everything is filed and rectified and reported accurately on your tax return. All right, so that about does it 13 Things you maybe didn't know about your health savings account at least before now and like the dude says lot of ns a lot of outside what have you here so hopefully you can now assess how well you have planned with your HSA in the past and where you might be a little bit more proactive on reducing your lifetime tax bill moving forward. Until next time, I am your host Shawn Terrell and we will talk to you again very soon. Thanks for listening and following along. Are you a dentist nearing your retirement from clinical or have you already done your handpiece? Would you like a treatment plan for the financial components of your exit from clinical our company that is Exit Planning helps dentists like you reduce taxes in retirement and optimize how to best live off your assets, including the ideal time for you to start taking Social Security. If you'd like guidance on those critical pieces, or just a second opinion, schedule an initial consultation with us on our website. Our web address is dentist exit.com And there's no obligation for your initial consultation, that website again dentists exit.com. As a reminder, Dentist Exit Planning and turtle advisors LLC is a registered investment advisor. The information presented should not be interpreted or construed as investment, legal tax, financial planning or wealth management advice. It does not substitute for personalized investment or financial planning from dentist Exit Planning or thorough advisors LLC. Please consult with your accountant and attorney for tax and legal advice. This podcast conveys the views and opinions of Sean Carroll and his guests and the information herein should not be considered a solicitation to engage in a particular investment tax planning for financial planning strategy. information presented is for educational purposes only and past performance is not indicative of future results.